Electricity Industry Act shake up

All industry participants – retailers, distributors, generators, and consumers – will be affected by these changes, which pick up on the recommendations from the Electricity Price Review report of 2019.

There will be an opportunity to make submissions at the select committee stage. We suggest you begin developing your response now.

Key changes

These are substantial and include:

• expanding the EA’s jurisdiction to take in the protection of domestic and small business consumers (and enabling it regulate for this purpose)
• moving the arm’s length rules from the Electricity Industry Act into the Electricity Industry Participation Code (Code) so that these can be amended by the EA. In particular, this will allow the EA to develop a new ring-fencing regime for distributors around contestable services
• enabling the EA to prescribe quality and information standards in distribution agreements, effectively overturning the decision in Vector v EA
• enabling the Minister to amend the Code if not satisfied with the EA’s amendment processes (the Bill indicates that the Minister could use this power, among other things, to require participants to act as market makers in the wholesale market and to require gentailers to publicly release information on the profitability of their retail activities)
• widening the EA’s information gathering powers (a change that had already been signalled in previous months), and
• establishing a small consumer advocacy agency, funded by an additional levy on industry participants, to advocate for small consumers.

We discuss below what we see as the four most significant changes.

Key change #1 – Code becomes consumer legislation

The statutory objective of the EA is currently to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers.

The Bill proposes to add a second objective: to undertake measures aimed at protecting the interests of domestic and small business consumers in relation to electricity supply. Small business consumers are those that consume less than 40 MWh of electricity per year.

In effect, this will enable the EA to turn the Code into a piece of consumer legislation. This is a dramatic shift in regulation and it is unclear how the new function will interface with the Fair Trading Act (FTA).

Should the EA choose to amend the Code to include consumer protections, we consider the tidiest solution would be to remove the electricity specific provisions from the FTA to avoid electricity retailers and distributors from being subject to claims under two separate statutes in relation to one set of circumstances.

We note that the Small Electricity Consumers Agency proposed in the Bill will also be tasked with representing and advocating for domestic and small business consumers – including promoting their interests to public service agencies and Crown entities.

Key change #2 – Arm’s length rules moved to Code

The Bill shifts the arm’s length rules (mandating separation between distributors and generators or retailers who share an ‘interest’ in each other) to the Code. The effect of this change will be to enable the EA to make rule changes through the Code consultation process rather than by legislative amendment to the Act.

The rationale the Bill provides for this change is that it will allow the EA to develop new rules to address any competition-related problems arising from the involvement of distributors and Transpower in emerging contestable markets.

But the Bill also provides that breach of the separation or arm’s length rules will render illegal the contract under which the conduct occurred.

Taken together, these two changes will mean that a previously valid services contract between interested parties could become void and unenforceable through Code amendments.

This expansion of the EA’s discretionary powers will introduce significant uncertainty into the sector as it will enable the EA to effectively restrain market participants from being involved in specified services or activities.

This has the potential to undermine existing investments, and to deter future investment, in emerging technologies and services. It also expands the EA’s role in competition policy, blurring the responsibilities of the EA and the Commerce Commission.

Key change #3 – Distribution quality terms

The Act currently restrains the EA from regulating via the Code anything that the Commerce Commission is authorised to regulate under Part 4 of the Commerce Act. This restriction was the subject of a Court of Appeal decision in 2019, in which the Court held that the EA may not impose quality standards on distributors of the type the Commission could impose under the Commerce Act.

The Bill would expressly reverse that position with the effect that distributors and Transpower may be subject to dual regulation by both the Commerce Commission and the EA. However, while the Commission determines quality standards in conjunction with approving the expenditure required to meet those standards, the EA has no role in approving expenditure.

The result is that the EA may impose quality standards without any assurance that those quality standards will be adequately funded through regulated revenue.

Key change #4 – Minister can amend Code

Currently only the EA can amend the Code and only going through a mandatory consultation process. The Bill changes this by allowing the Minister of Energy and Resources to amend the Code directly if of the view that the Code’s provisions are not satisfactory and the amendment will further the EA’s objectives.

The types of Code amendments the Minister can make include:

• limiting retailer saves and win-backs
• requiring retailers to provide further information to the EA to promote switching
• requiring participants to make information available to improve the performance of the wholesale market
• requiring participants to act as market makers in relating to wholesale electricity contracts, and
• requiring gentailers to release information about the profitability of their retailing activities.

The Minister must still comply with the consultation process in the Act, as though the amendment were one introduced by the EA.

The Minister has a limited time period within which the power to amend the Code can be exercised – during years two to four after the Bill comes into force.

Context

The Bill seeks to cover off five of the as yet unaddressed recommendations of the September 2019 Electricity Price Review report:

• strengthening the consumer voice
• clarifying ambiguity in the EA’s powers to regulate to protect small electricity consumers
• ensuring the EA is able to regulate all parts of distribution access agreements, as it does for transmission
• enabling more adaptive regulation in response to technological advances, and
• improving the EA’s powers to gather information from industry participants.

What next?

The Bill will have its first reading and in due course will be referred to a Select Committee, at which point there will be a consultation process.

We recommend starting preparation for submissions now. Contact us to get started.