Proposed Amendments Arising from Industry Reforms
Removal of Disclosure Requirements Applying to ECNZ
6. Given that none of the ECNZ successor companies will be dominant in the generation market, the Ministry proposes that the specific disclosure requirements applying to ECNZ be revoked following a final Government decision, expected in December, to proceed with plans to split ECNZ into three competing SOEs. Specifically, the Ministry proposes that, when the split takes place:
- Regulation 4, which requires ECNZ to disclose financial statements, be deleted; and
- the parts of Regulations 7 and 8, which require ECNZ to disclose prices, terms and conditions of its generation contracts or arrangements, be deleted.
Continuation of Disclosure Requirements Applying to Line Businesses
7. The separation of line businesses from retail/generation businesses will have no impact on the regulatory concerns arising with natural monopoly line activities. Accordingly, the Ministry proposes that the current disclosure requirements applying to line owners be continued. Specifically, all line owners will continue to be required to:
- Disclose financial statements and performance measures covering their natural monopoly line businesses (Regulation 6): From 1 April 1999, line companies will be precluded by the Electricity Industry Reform Act from being involved in significantly-sized generation or retail activities. They may, however, be involved in any other contestable activities.
The mandatory avoidable cost allocation methodology (ACAM) (that applies for 1998/99) has been amended to the extent required to reflect this. A draft of the ACAM for line businesses is in Annex 1. The financial statements for the line business produced using this draft, for 1999/2000, will be comparable to the line business statements produced in 1998/99.
Further to the requirements of the Electricity Industry Reform Act, it should be noted that no items arising from hedge contracts for risks relating to the price of electricity in New Zealand are to be allocated to the line business financial statements. Such items (depending on the circumstances and accounting treatment) might include assets or liabilities, and losses or gains (they might also include costs arising from guarantees relating to performance under hedges). This allocation requirement is covered by the mandatory ACAM, as set out in Annex 1. Any such items are to be allocated to "Other".
- Disclose prices, terms and conditions for supply of line services (Regulations 9 and 10): No changes are proposed here.
- Disclose line charges and line charge methodologies (Regulations 18, 22 and 23): The Ministry is proposing some amendments to these requirements, as outlined in paragraphs 13-16 below.
Amendments to Disclosure Requirements Applying to Retail and Generation Activities
8. The reforms of the electricity industry will promote retail competition in two ways:
- full ownership separation of line and retail activities will address concerns about line businesses subsidising their retail activities and restricting access to their lines by competing retailers; and
- after the introduction of a low-cost switching system on 1 April 1999, retailers will invite competitive entry if they seek to overcharge smaller retail customers in order to subsidise larger retail customers.
Discontinuation of Requirements for Retailers and Generators to Disclose Contracts and Performance Measures
9. Certain existing or proposed disclosure requirements were intended to make dealings with retail customers more transparent. The Government's electricity reforms will remove dominance of the generation and retail markets and should (inter alia) eliminate retailers' ability to overcharge smaller retail customers. Accordingly, the Ministry proposes that, after 1 April 1999, the following requirements will not be required:
- Retail contracts: The requirement in Regulations 11 and 12 that retailers which are in a prescribed business relationship with a line owner disclose prices, terms and conditions for supply of retail services.
- Retail performance measures: Amendments requiring disclosure of financial and efficiency performance measures for combined line and retail services, amongst those being introduced for 1998/99.
- Incremental revenue for retail: Amendments requiring retailers to disclose details of the revenue they obtain from small, medium and large electricity retailing customers, amongst those being introduced for 1998/99.
- Generation contracts: The requirements on generators in prescribed business relationships with line owners (in Regulations 7 and 8) to disclose prices, terms and conditions of their generation contracts, including imputed prices for electricity purchased by the related retail business. (Note that while line and generation activities are in common ownership, however, the line business financial statements will continue to be required to include details of any transfers to the generation business for avoided transmission or distribution costs.)
Continuation of Financial Statement Disclosure by Retailers and/or Generators in Common Ownership with Line Companies
10. After 1 April 1999, line and supply companies which are owned by settling and mirror trusts, or which have adopted corporate separation pending full ownership separation, may continue to have incentives to subsidise their contestable retail and/or generation activities from their line businesses.
11. Accordingly, the Ministry proposes that, in addition to the requirement for line companies to disclose separate financial statements for their line activities (as outlined in paragraph 4 above), supply companies which are owned by settling or mirror trusts or which have adopted corporate separation, will be required to disclose a single set of financial statements covering the incremental costs, revenues, assets and liabilities of their combined retail and generation activities.
Financial Statement Disclosure Model under Ownership Separation (See Para 4 Above)
Financial Statement Disclosure Model under Mirror Trust or Corporate Separation
| | | Retail & GenerationINCREMENTAL COSTS |
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A draft methodology for allocation of costs, revenues, assets and liabilities between supply companies' retail/generation and "other" activities is included in Annex 1.
12. Once the owners of these companies comply with ownership separation, disclosure of financial statements for retail and/or generation activities will no longer be required.
Proposals for Amending Transfer Payment Disclosure Requirements
13. Regulation 20 requires disclosure of prices, terms and conditions for transfers of goods and/or services between businesses which are in prescribed business relationships with each other. The rationale for this is that inappropriate pricing of transfers between business activities provides considerable scope for hiding monopoly profits or cross-subsidising contestable activities from non-contestable activities. The Ministry proposes that, in the light of separation, Regulation 20 be amended to ensure that it requires disclosure of details of transfers between:
- line and "other" businesses with which they are in a prescribed business relationship, such as asset construction businesses (this may require an amendment to section 170(1)(ha) of the Electricity Act 1992); and
- line and retail/generation companies which are in common ownership (that is, mirror-trust owned companies and companies subject to corporate separation prior to full ownership separation).
Level of Aggregation of Transfer Payments for Asset Construction and Maintenance Work
14. In order to enable scrutiny of the appropriateness of intra-company transfer payments from a line business to their "other" business for asset construction (provided by another section of the company), the Ministry proposes that line owners be required to disclose disaggregated details of these, in the following categories: (i) subtransmission assets; (ii) substations; (iii) lines; (iv) MV switchgear; (v) transformers; (vi) substations; (vii) LV reticulation; and (viii) other system fixed assets, as categorised in standard asset tables in the ODV Handbook.
Proposal for Amending Requirement for Disclosure of Amount of Electricity Conveyed on Behalf of Other Persons
15. Following ownership separation, the requirement in Part III of the First Schedule of the Regulations for line owners to disclose the total amount of electricity conveyed through their lines on behalf of "other persons" will not be meaningful. All electricity retailers will be separate persons from line companies. In order to assist in monitoring the development of retail competition, the Ministry proposes that line companies instead be required to disclose the amount of electricity they have conveyed annually on behalf of different retailers supplying customers on their network. The line company would not be required to disclose the names of the retailers, just the amount conveyed on their behalf. For example: Retailer A, 5 GWh; Retailer B, 6.5 GWh etc.
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