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Changes to electricity regulation focus on consumer interests and innovation

Home Insights Changes to electricity regulation focus on consumer interests and innovation

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Contributed by: Craig Shrive and Ben Gregson

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Published on: September 10, 2021

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Yesterday the Electricity Industry Amendment Bill (Bill) was introduced to Parliament. Following recommendations from the Electricity Price Review, the Bill will implement a range of new measures designed to protect (small) consumer interests and to ensure that the regulatory framework for the electricity industry remains fit for purpose as technologies and business models evolve. 
 
As summarised below, the key changes include:

  • establishing a small consumer advocacy agency;

  • clarifying that the Electricity Authority (Authority) can use the Electricity Industry Participation Code (Code) to protect domestic and small business consumers;

  • providing greater regulatory flexibility to restrict the involvement of lines companies in new competitive markets;

  • enabling the Authority to regulate all aspects of distribution use of system agreements; and

  • giving the Minister new powers to amend the Code. 

Small consumer advocacy

The Bill will provide for the establishment of a new agency to represent and advocate for the interests of domestic and small business consumers in the electricity industry. Small business consumers are those who consume less than 40 MWh of electricity per year or who are otherwise specified in regulations.
 
The Bill states that the agency could carry out this function by, for example:

  • promoting the interests of domestic consumers and small business consumers to relevant public service agencies and Crown entities;

  • providing evidence-based advocacy on behalf of domestic consumers and small business consumers, whether in response to policy proposals or on its own initiative.

 
In the Cabinet Paper that set out the case for the agency (then referred to as a council), the Minister of Energy and Resources envisaged that it would:

  • analyse potential policy, regulatory and service options that could address concerns and issues of domestic and small business consumers;

  • advocate on behalf of these consumers in regulatory consultations and other decision-making processes that affect them in relation to their electricity supply; and

  • proactively inform regulators when electricity markets are not working for these consumers.

Under the Bill, the agency will comprise one or more persons (which could be an existing Crown organisation) appointed by the Minister. The Cabinet Paper indicated it will be governed by a terms of reference that would be consulted on and approved by Cabinet, which would cover the role and purpose of the agency, its membership, appointment process, and how the agency will engage with other Government departments.
 
The Bill also provides for the agency to receive funds from the electricity sector levy, and includes requirements for the agency to consult with industry participants before seeking such funding from the Minister.

Clarifying the powers of the Electricity Authority to amend the Code

The Bill will establish an additional objective of the Authority to protect the interests of domestic and small business consumers in relation to the supply of electricity to those consumers. The Code will also be expressly permitted to include such content.
 
The Electricity Price Review recommended introducing this objective to remove a regulatory gap in the protection of consumers’ interests. That gap exists because of uncertainty about whether, in regulating in the long-term interests of consumers, the Authority would be acting inconsistently with its other statutory objectives of promoting efficiency, competition and reliability of supply in the sector.
 
The addition of an explicit consumer protection objective resolves this uncertainty. It is expressly limited to apply only to the Authority’s activities in relation to the dealings of industry participants with consumers (and not other industry participants). These activities include, for example, the manner in which electricity retailers acquire new residential customers, the terms and conditions of residential retail contracts, and billing practices.

Regulating distributors' involvement in contestable markets

Part 3 of the Act contains rules that are designed to prevent distributors being involved in retail and generation markets within their network area in a manner that could harm competition. The emergence of new technologies has begun to blur the boundaries of these markets. Further, Transpower is not currently subject to these rules.
 
The Bill will not make substantive changes to the rules. It would simply move the existing rules governing distributors’ involvements in retail and generation markets from Part 3 of the Act to the Code. The idea is that, compared to a statutory regime, the Authority will have greater flexibility to respond to any competition-related problems arising from distributors involvements in other contestable markets as and when they arise – and will also have the ability to apply restrictions to Transpower if issues emerge. The Code will also be expressly permitted to include content that imposes obligations on people involved in the relevant entities (such as directors).
 
The Authority will therefore be able to make new rules applying to involvements between Transpower and distributors (and persons involved in those entities) and any contestable market in the electricity industry (not only retail and generation businesses).
 
It would also allow the Authority to amend any of the existing rules, including the circumstances in which they apply (eg the thresholds at which the application of the rules is triggered currently), provided that such amendments comply with statutory provisions about the content of the Code.

Regulating distribution access terms and conditions

The Bill will expand the jurisdiction of the Electricity Authority to regulate all terms and conditions of distribution access agreements, including in relation to quality standards and information disclosure requirements.
 
The Act prevents the Authority from regulating any matter over which the Commerce Commission has jurisdiction under Part 4 of the Commerce Act. This limitation on the Authority's power was the focus of a Court of Appeal decision in 2019, in which Vector successfully obtained a declaration that two clauses in a default distributor agreement proposed by the Authority were unlawful on the basis they purported to regulate quality standards – which was within the Commission's jurisdiction. The Court of Appeal did not define what these quality standards were, and so there remains some uncertainty about precisely what terms fall outside the Authority's jurisdiction to regulate.
 
The Bill resolves this uncertainty by enabling the Code to regulate all distribution access terms and conditions, as it already does for transmission, despite the broader statutory restriction on the Authority's jurisdiction.

Minister's powers to amend the Code

When the Act and Code were first implemented, the Act set out various matters to be included in the Code, and gave the Minister power to amend the Code if the Code did not satisfactorily address the matter.
 
The Bill includes a new list of matters where the Minister can intervene if not satisfied with the Code, as follows:

  • requirements for retailers to process consumer requests for information about their electricity consumption;

  • limitations on retailer saves and win-backs;

  • requirements for retailers to provide information to the Authority to enable it to better direct its efforts to promote to consumers the benefits of comparing and switching retailers);

  • requirements for distributors to offer retailers standard terms for access to their networks;

  • requirements for certain categories of industry participant to make available information directed at improving the performance of the wholesale market;

  • requirements for certain industry participants to act as market makers in relation to the trading of some wholesale electricity contracts; and

  • requirements for some or all industry participants that are both generators and retailers to release information about the profitability of their retailing activities.

The Minister may not exercise the power within two years or later than four years after the provision comes into force. Although the Code already addresses these matters, the likely effect of the provisions is to require the Authority to review whether further changes to the Code are required.

 

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