5. Summary
107. Several options of how to remove the unnecessary barriers to lines companies' investment in generation have been considered. Table 2 summarises these options and orders them from preferred through to options not recommended at this stage.
Table 2: Summary of Proposed Options| Proposal and Recommendation | Objective (Intended benefit) | Risks (Possible detriment) |
|---|
Allow hedging of financial risks
(Preferred option) | Facilitate investment by enabling lines companies to better manage revenue flows from their output. Increase competition in retail market | Low. Lines companies' generation and retail activities are capped at the amount of their own generation. |
Remove the requirement for lines companies to comply with arms length rules when generation and customers are outside the lines company network
(Preferred option) | Facilitate investment in generation by capturing benefits of lines company knowledge of electricity sector; removing incentives for anti-competitive behaviour on local network | Possible risk of cross-subsidy. However, this risk should be managed through monitoring under part 4A of the Commerce Act. |
Provide greater flexibility for lines companies to decide how to implement arms length rules
(Not recommended - current exemptions process should take into account situations where lines companies require additional flexibility in ALR) | Facilitate generation investment by reducing administrative costs of compliance with arms length rules | May have very high costs for cases to be decided plus high on-going monitoring costs to ensure compliance |
Provide criteria in legislation to guide applications for exemptions from EIRA
(Not recommended as compulsory criteria, there may be value in including additional criteria the Commission may take into account.) | Provide a more transparent and timely process for applicants for exemption from the provisions of EIRA | May make process too prescriptive and more difficult to gain exemption. If compulsory criteria may slow exemption applications process. |
Make changes to the wording of arms length rules in Schedule 1 of EIRA
(Not recommended) | Reduce uncertainty and therefore increase investment | Unclear whether this is actually a problem, more certainty may make rules more prescriptive and discourage generation investment. |
Raise the threshold for arms length separation
(Not recommended) | Facilitate investment in generation by reducing costs of cross-ownership | Risk of lessened competition through increased opportunity for cross-subsidy and anti-competitive behaviour on local network |
Introduce less onerous arms length requirements
(Not recommended) |
108. The Ministry considers an ability to trade in hedge and spot energy markets (up to the nominal output of their generating capacity, assuming that it is available on a continuous basis) will be an important aspect in lines companies' investment decisions. It is also considered to be a necessary step in the effective implementation of the policy decisions taken as part of the 2004 Amendment of the Act. The Ministry is therefore proposing to progress this proposal by recommending a legislation change to the Minister of Energy with the details of the policy to be worked out (in consultation with the industry) once the Government gives a high level policy approval for this proposal.
109. There is a case for removing the arms length rules when generation is connected to an unrelated network. Generation not connected to local networks will capture any benefits of comparative advantage lines companies have in generation investment, while not providing incentives for companies to use their knowledge to behave anti-competitively.
110. The Ministry considers that a separate regime for lines companies to apply for flexibility in the application of arms length rules is not necessary. The current exemptions regime should take into account cases where lines companies are seeking additional flexibility in the application of arms length rules and any new process for assessment would be sufficiently similar to the current exemptions regime.
111. Introducing additional criteria in legislation for the consideration of exemptions is not considered necessary at this stage. Not many cases requesting exemptions for investment in new generation have yet been considered. On balance, the Ministry's recommendation is that additional criteria would be included as something that may be taken into account, rather than must be taken into account.
112. The Ministry does not recommend redrafting the provisions of the arms length rules in Schedule 1 of EIRA at this stage.
113. Raising of the threshold where arms length rules apply to 50 MW (i.e removing all statutory constraints on cross-ownership or making changes to the arms length rules to make these less onerous are not considered appropriate at this stage. The Ministry considers that these proposals would have a significant risk of enabling anti-competitive behaviour by lines companies in generation and retail markets. However, the Ministry is evaluating the merits of raising the lower thresholds where arms length rules apply and will consider submissions addressing this issue.
114. The Ministry, however, recognises that in some instances, the cost of compliance may outweigh the benefits. In these situations, lines companies are encouraged to seek exemption under s 81 of the Act. Since the introduction of the Act, the Commerce Commission has considered a limited number of exemptions and a significant increase in the number and similar nature of the granted exemptions could warrant a review of aspects of the legislation in the future.
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