Regulatory Alert – 20 February 2019
The Panel for the Electricity Price Review has today released its options paper, which details its preferred options for reform of the electricity industry.
In general, the Panel has focused on measures to address affordability and fairness concerns in the industry, rather than core competition and efficiency matters. As such, the Panel's preferred options are reasonably light-touch, and it has not favoured heavy-handed changes to the electricity market (such as the introduction of retail price caps and structural separation for generators and retailers).
As the options detailed by the Panel are high-level and preliminary, there is significant scope for the final form of the preferred measures to change as the Review progresses.
Key options preferred by the Panel are summarised below.
The Panel listed a number of changes it preferred, to mitigate the "two-tier" market it considered has developed in the retail electricity sector. While it did not favour retail price caps, the Panel confirmed that it wished to pursue:
- merging price comparison websites Powerswitch and Whatsmynumber and improving their performance;
- requiring retailers to provide information on switching and utilities disputes on consumers' power bills through an amendment to the Electricity Industry Participation Code 2010 (Code);
- prohibiting retailers from 'winning back' customers if they decide to switch (based on the rules in the telecommunications sector); and
- having the Electricity Authority (Authority) negotiate a bulk deal for consumers that have not switched retailers for many years. This would involve granting the Authority the power to require retailers to hand over information about long-term customers.
The Panel also favoured the creation of a cross-sector energy hardship group. This group would co-ordinate matters relating to energy hardship at the national level and would implement energy hardship initiatives. This would include establishing a network of community-level support services, a fund to help households experiencing energy hardship, and the setting of mandatory, enforceable minimum standards to protect vulnerable customers. The Panel is undecided on whether it should be funded by the Government or through an electricity industry levy.
For the generation market, the Panel rejected forced ownership separation for gentailers, but listed a number of favoured options for improving operation of the wholesale market. These include:
- Strengthening the existing disclosure rules in the Code due to concerns from retailers that gaps remain in the information that generators are required to disclose.
- Mandatory market-making obligations on gentailers to ensure they quoted buy and sell prices for certain benchmark contracts, and price spreads were within a maximum range. To mitigate the potential harm to gentailers if supply was limited, the Panel appeared to prefer predefined "stress provisions", so that the obligation to quote fixed contracts could be suspended if the contract price moved by a predefined amount on a single day.
- Gentailers would have to disclose financial performance of their generation and retailing operations.
- The Authority would periodically compare wholesale contract prices with new-generation costs to determine if generators were making excessive profits.
Distribution and transmission markets
The Panel favoured an amendment to the Electricity Industry Act 2010 (Act) to confirm that the Authority can regulate terms and conditions for use of distribution and transmission networks.
Further, it endorsed the view that the Authority should have the flexibility to develop and refine, over time and as markets change, rules for distributors' involvement in distributed energy markets.
There were a number of other high-level options favoured by the Panel in respect of distribution and transmission. These include:
- Requiring distributors to offer retailers standard terms for network access.
- The government issuing a separate policy statement on distribution and transmission pricing to the Authority. The Panel asked for suggestions on the content of the statement.
- Guaranteed access by distributors to smart meter data on reasonable terms through an amendment to the Code.
- Strengthening the Commerce Commission's (Commission) powers to regulate distributors' performance, including:
- giving power to the Commission to require a distributor to move from compliance with default price-quality regulations to more stringent customised price-quality regulations subsequent to an investigation;
- imposing higher maximum penalties to deter big distributors from breaching price-quality regulations; and
- allowing the Commission to use comparative benchmarking (for example, comparison between distributors' performance) as an input when setting price-quality regulations.
- Encouraging the Commission to make better use of its existing powers by:
- applying a "minimum practice" or "good practice" standard to distributors' asset management plans;
- developing forward-looking quality standards for distributors subject to price-quality regulation; and
- assessing and publishing details of collaboration between distributors.
- Low fixed charge tariff regulations would be amended so that price caps for low-use residential consumers would be gradually removed.
The Panel was uncertain on a number of changes for distributors. These include:
- Whether the Government should regulate to ensure a fair allocation of distribution costs between household and business customers. While the Panel considered that a greater allocation of costs to business customers would increase fairness, it was concerned about the increase in regulatory compliance costs for distributors.
- Whether distributors should require approval to proceed with price increases so that consumers did not experience unacceptable price shocks.
Other potential changes
The Panel considered amending the statutory objectives for the Authority and the Commission to include environmental and fairness goals (such as, for example, reducing greenhouse gas emissions). However it ultimately decided that such objectives were better directed through government policy statements. The Panel did however recommend amending the Act to clarify that the Authority should explicitly consider consumer protection. The Panel was also undecided on a separate proposal to amend the statutory objectives to require both regulators to consult with consumers when making policy decisions that could affect electricity prices.
While the Panel did not favour transferring regulatory functions for distribution and transmission from the Authority to the Commission, the Panel did support exploring the idea of establishing a joint electricity and gas regulator. This would incorporate the functions of the Authority with comparable functions for the natural gas industry.
Submissions on the Paper are due on Friday 22 March at 12pm.
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