ELECTRICITY DISTRIBUTION AND RETAIL REFORMS

Electricity supply companies are to be divided into separate line and energy businesses, the Treasurer, Winston Peters, and Minister of Energy, Max Bradford, said today.

The split of ECNZ into three state-owned enterprises will result in greater competition and lower generation prices.

"To ensure that these lower prices flow through to electricity consumers, it is essential to address the distribution and retail parts of the electricity sector," the Ministers said.

"The measures reinforce the Government's determination to get a better deal for household and business consumers.

"This package includes ownership separation of lines businesses, the threat of price control for those who do not perform, better information for consumers, and the practical means for consumers to switch supplier if they are unhappy with the cost or level of service they receive," the Ministers said.

Distribution and retail initiatives in the electricity reform package

Monopoly lines businesses are to have different owners from the competitive businesses of electricity retailing and generation.
Lines businesses, which do not face competition, will face an increased risk of price control if they don't deliver the best possible prices to consumers.
Power companies will be required to disclose better and more user-friendly information on prices, costs and efficiency.
The Government will publish improved analysis of disclosed information to enable better comparisons of the performance of power companies.
The industry will be required to establish low cost switching arrangements to enable customers to change retailers. If the industry fails to deliver within 12 months, the Government will introduce a mandatory default system.
Separation of Lines and Retail/Generation Businesses
Legislation will be introduced to ensure that electricity retailing/generation and electricity lines are not in common ownership.

Separation of lines and retail/generation services will remove the incentive for lines to frustrate competition in retailing. They can do this now by making line access difficult or by cross-subsidising competitive activities like retailing from their captive line customers.

Separation will also help focus line companies on asset management (including security of supply) and cost minimisation. By contrast, retail and generation businesses are entrepreneurial and competitive - they require an entirely different focus.

Legislation will be based on the following:

No person with an electricity lines business may own more than ten percent of a business that is involved in electricity retailing or generation, or vice versa.
Two or more persons with an electricity lines business may not own more than 20 percent in aggregate of a business that is involved in electricity retailing or generation, or vice versa.
Similar rules will prohibit the exercise of material influence by a person involved in electricity lines over a person involved in electricity retailing or generation and vice versa, whether by contract, arrangement or understanding.
These rules are necessarily stringent:

to ensure that companies with disparate ownership are not disproportionately influenced by concentrated small holdings;
to minimise the opportunities and incentives for companies to maintain indirect control, to develop artificial avoidance arrangements, or to use litigation for tactical purposes; and
to provide for effective enforcement.
Electricity companies have a choice on how they implement ownership separation. They can either:

Option 1: set up a separate trust by 1 April 1999 to own and run whichever business they do not wish to keep; or
Option 2: sell whichever business they do not wish to keep by 31 December 2003.
Companies choosing Option 2 will be required from 1 April 1999 to the date of completion of the sale to operate their lines and retail/generation businesses as separate companies on an arms-length basis.

Stronger Threat of Price Control
Operating lines is a natural monopoly business. Even after lines are separated from retail/generation businesses, the monopoly problem remains with the risk of excessive line prices.

The credibility of the threat of price control on the monopoly lines businesses needs to be enhanced. The Government has therefore agreed in principle, subject to further work on design and implementation, to:

empower the Commerce Commission to decide to apply price control (subject to Ministerial override) within Government set criteria or thresholds. In effect, the Commission would police compliance by lines companies with the Government's thresholds or criteria; and
amend the Commerce Act to enable the Government to obtain advice from the Commerce Commission on thresholds or criteria for the application of price control.
Improved Information for Consumers
Companies are already required to publicly disclose a wide variety of information about their profitability, efficiency, reliability and prices. This disclosure is intended to make transparent excessive costs and prices and to promote competition. The Government has decided to:

strengthen the Electricity (Information Disclosure) Regulations 1994, and the ODV (Optimised Deprival Value) handbook for valuing electricity line businesses (for more details refer to the "Electricity Reform Package" document);
fund additional analysis of disclosed information, and to make this available to consumers. This will include preparing and publishing additional comparative performance information; and
require companies to disclose line charges on customer bills and to publish "user-friendly" summaries of their disclosures (in addition to their full disclosures).
Switching by Consumers
Barriers to consumers switching to retailer suppliers could be reduced if the industry agreed on low cost protocols for metering and data reconciliation. However, existing retail companies have little incentive to do this because they fear losing consumers. To ensure that small consumers can switch retailer:

The Government will require the industry to establish a low cost mechanism that will enable domestic and other customers to switch retailers. The Government will seek monthly reports from the industry on progress.
If the industry fails to deliver by April 1999, the Government will introduce a mandatory default system by regulation. The Electricity Act 1992 will be amended to provide the Government with regulation-making power.
"In the next few years exciting developments in half-hourly metering are expected, and this needs to be encouraged. In the meantime, to get the benefits of competition, some form of 'profiling' (which estimates half-hourly usage) is likely to be required," the Ministers said.

"These measures show how serious the Government is about increasing competition, providing meaningful choice, and lowering prices in electricity.

"While the earlier electricity reforms have improved efficiency in the industry, they have not benefited smaller consumers. These new distribution and retail initiatives will help to make sure that smaller consumers also share in the benefits."

Further information is available on the Internet: http://www.moc.govt.nz/