Part 3: About the Electricity Commission

Electricity Commission: Review of the first five years.

3.1
In this Part, we describe:

3.2
The Commission has about 40 staff, and is responsible for a total budget of about $96.5 million in 2009/10. It is governed by a Board with no fewer than five and no more than nine members.

3.3
Giving effect to the Government Policy Statement's objectives and outcomes is one of the functions of the Commission. The Government Policy Statement is intended to be a tool to convey the Government's objectives and outcomes for the governance of the electricity industry. However, it goes further than this in that it sets specific tasks and sometimes processes to be followed by the Commission.

3.4
During its first five years, the Commission has focused on completing the tasks set out in the Government Policy Statement. From this task-based perspective, the Commission considers that it has a strong record of achievement. However, it has not been able to establish the degree to which it is achieving the higher level objectives and outcomes in the Government Policy Statement.

Principal objectives and specific outcomes

3.5
The Commission began operating in September 2003. It regulates the operation of the electricity industry and electricity markets (wholesale and retail) in keeping with the Act, electricity governance regulations, the Electricity Governance Rules 2003, and the Government Policy Statement.

3.6
As set out in the Act, the Commission's principal objectives are:

  • to ensure that electricity is produced and delivered to all classes of consumers in an efficient, fair, reliable, and environmentally sustainable manner; and
  • to promote and facilitate the efficient use of electricity.

3.7
In line with the principal objectives, the Commission must seek the following specific outcomes:

  • Energy and other resources are used efficiently.
  • Risks (including price risks) to the security of supply are properly and efficiently managed.
  • Barriers to competition in the electricity industry are minimised for the long-term benefit of end-users.
  • Incentives for investment in generation, transmission, lines, energy efficiency, and demand-side management are maintained or enhanced and do not discriminate between public and private investment.
  • The full costs of producing and transporting each additional unit of electricity are signalled.
  • Delivered electricity costs and prices are subject to sustained downward pressure.
  • The electricity sector contributes to achieving the Government's climate change objectives by minimising hydro spill,1 efficiently managing transmission and distribution losses and constraints, promoting demand-side management and energy efficiency, and removing barriers to investment in new generation technologies, renewable sources of energy, and distributed generation.

Accountability arrangements

3.8
The Commission is a Crown entity and must meet the accountability requirements of the Crown Entities Act 2004. These requirements include preparing an SOI and an annual report.

3.9
The Electricity Act 1992 sets additional accountability requirements. In particular, section 172ZL of the Act requires the Commission to include, in its SOI, performance standards for all Government Policy Statement objectives and outcomes, against which the Commission's performance may be judged. The Commission reports its achievements against these performance standards to the Minister of Energy every quarter, as well as in its annual report.

3.10
The Ministry of Economic Development monitors the Commission's performance. The Ministry of Economic Development is largely responsible for developing and implementing policy in the electricity sector, reviewing and developing legislation, monitoring the performance of the Commission, and monitoring electricity prices. The roles and responsibilities of the Commission and the Ministry of Economic Development are further explained in the Appendix.

3.11
The accountability requirements for the Commission are set out in Figure 1.

Figure 1
Accountability requirements for the Electricity Commission

Figure 1: Accountability requirements for the Electricity Commission.

Government Policy Statement on Electricity Governance

3.12
The Act requires the Minister of Energy to set out objectives and outcomes for the Commission in a statement of government policy on electricity governance. This statement must be consistent with the Act.

3.13
The first Government Policy Statement was issued in December 2000, which was before the Commission was established. Its purpose was to explain the Government's policy on electricity governance to the self-regulating electricity industry. The Government Policy Statement replaced previous statements of government policy on electricity.

3.14
The Minister of Energy has powers to change the Government Policy Statement and did so in 2002, 2004, 2006, 2008, and 2009.

3.15
The Government Policy Statement sets out both general policies for the Commission's regulation of the industry and operational policies for doing this. It includes specific tasks and expectations. Some sections include descriptive or contextual background.

3.16
An example of task-oriented operational policy, under the heading "Consumer Protection", is "Arrangements in the event of retailer insolvency".2 This section notes that the Commission should devise a transition process for consumers whose retail supplier becomes insolvent. Even more specific outcomes are detailed, such as "Arrangements for the benefit of low income and vulnerable domestic consumers". It includes instructions and options for dealing with non-paying consumers.

3.17
By contrast, under the "Electricity Efficiency" heading, the Government Policy Statement in 2006 set out high-level policy objectives for the Commission working closely with the Energy Efficiency and Conservation Authority (EECA) and other agencies towards the then Government's aim of efficient and environmentally sustainable use of electricity. The 2008 and 2009 Government Policy Statements have more detailed expectations.

3.18
The level of direction given and requirements of the Commission have differed between versions of the Government Policy Statement.

The Government Policy Statement before the Commission was established

3.19
The 2000 and 2002 Government Policy Statements set out the Government's expectations for industry action and its views on governance matters. At that stage, the Government wished to see further evolution of self-regulating arrangements and it used the Government Policy Statement to set guiding principles for the evolution of those arrangements.

The Government Policy Statement as it relates to the Commission

3.20
The 2004, 2006, 2008, and 2009 Government Policy Statements set out the Government's expectations of the Commission. Essentially, these Government Policy Statements have all covered:

  • security of supply;
  • consumer protection;
  • electricity efficiency;
  • renewable energy (added in 2006);
  • system operation, and wholesale and related markets;
  • transmission;
  • distribution;
  • relationship with the Commerce Commission;
  • distributed generation; and
  • retail competition.

3.21
The focus and tasks of the Commission have changed between Government Policy Statements, as has the amount of direction given. For example, the 2004 Government Policy Statement set out a timetable for delivering new transmission arrangements and required the Commission to publish a detailed work plan for achieving the timetable.

3.22
In addition, the 2004 and 2006 Government Policy Statements set out the Government's priorities for work on the objectives and outcomes. They directed that priority be given to:

  • managing security of supply and implementing the reserve energy mechanism (that is, contracting for reserve energy);
  • working with Transpower and grid users to facilitate priority investment in the national grid;
  • promoting efficient use of electricity; and
  • improving hedge market transparency and liquidity, and demand-side participation.

Current Government Policy Statement requirements

3.23
From 2008, the Government Policy Statement requires the Commission to prepare a number of agreements and contracts between the Commission and different parts of the electricity sector, and between industry participants, including consumers.

3.24
These agreements and contracts include:

  • model contracts (for example, domestic consumer contracts, contracts with reserve energy providers, contracts between lines companies and electricity generation companies, and contracts for reconciliation3 projects);
  • memoranda of understanding between the Commission and EECA, and the Commission and the Commerce Commission;
  • model agreements for distribution of systems and distributed generation; and
  • benchmark agreements with Transpower.

3.25
The Government Policy Statements since 2008 require the Commission to have processes for consultation with the industry, including:

  • consultation on development and subsequent publication of the Security of Supply policy;
  • systems to receive proposals for rule changes;
  • consultation on projects such as the Strategic and Tactical Wind Projects; and
  • consultation on reviews such as the Review of Reserve Energy Policy.

3.26
The Government Policy Statement also requires the Commission to consult the Ministry of Consumer Affairs when pursuing outcomes that might directly affect small consumers.

3.27
The Government Policy Statement also requires the Commission to monitor security of supply and to publish information about this on its website.

3.28
The Government Policy Statement gives the Commission primary responsibility for ensuring that the physical system and wholesale and retail markets operate efficiently. The Commission is expected to promote and facilitate vigorous competition in both markets, including making recommendations to the Minister of Energy.

3.29
The Commission is responsible for the regulatory framework for transmission services, and for approving (or not approving) major capital investments in the national grid. Transpower is responsible for planning, developing, and operating the national grid. The Government Policy Statement includes the objective that the Commission publish a Statement of Opportunities at least every two years. The purpose of the Statement of Opportunities is to identify potential opportunities for efficient management of the national grid, including investment in upgrades and investment in transmission alternatives.

3.30
In preparing the Statement of Opportunities, the Electricity Governance Rules 2003 require the Commission to aim to meet the reasonable requirements of Transpower, investors in generation, other participants, end-user consumers, and those interested in evaluating transmission alternatives, and to reflect good electricity practice.

3.31
Transpower is required to submit grid update proposals to the Commission. The Electricity Governance Rules provide a process by which investment proposals are evaluated and - if the criteria are met - approved by the Commission. The Statement of Opportunities is important for the Commission's consideration of investment proposals submitted by Transpower. This is because the generation scenarios and demand forecasts in the Statement of Opportunities are the default "market development" scenarios used to analyse an investment proposal in a Grid Upgrade Plan.

Relationship between the Government Policy Statement and the Commission's Statement of Intent

3.32
The Government Policy Statement was originally prepared to communicate government policies and objectives to a self-regulating sector. However, the Commission is a Crown entity and as such produces an SOI.

3.33
The Electricity Act 1992 requires the Commission to align the content of its SOI with the Government Policy Statement.

3.34
The Commission, in its Statement of Intent 2005-2008, set out:

  • performance targets and measures for 2005/06 that were aligned with the 2004 Government Policy Statement provisions;
  • a summary of the Government's requirements as set out in the Government Policy Statement; and
  • the activities that the Commission was carrying out to meet those requirements.

3.35
The 2004/05 and the 2005/06 annual reports included separate reports on the Commission's achievements against the performance targets and measures listed in its SOI and its progress with the requirements of the Government Policy Statement.

3.36
With support from both the Ministry of Economic Development and the appointed auditor, the Commission has further aligned the Government Policy Statement and the SOI. Part four of the Statement of Intent 2009-2012 now sets out the work programme and performance standards in the same order as the Government Policy Statement.

1: Hydro spill happens when water is released without going through the hydro plant and generating electricity.

2: This example is found in the 2004 to 2009 Government Policy Statements.

3: "Reconciliation" means the process of matching the electricity supplied to consumers by individual retailers with actual demand at a national grid exit point.

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