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• Electricity

• Regulatory Framework

• Reviews and Development

• Facilitating Investment

1. In the United Kingdom, under the Utilities Act 2000, electricity supply and distribution activities are separate licensable activities, with a bar on the same person holding both an electricity supply and an electricity distribution licence.⁶ The standard Licence Conditions for Electricity Distribution Licences⁷ specify restrictions on the use of certain information and independence of the distribution businesses. Any information in relation to management and operation of the distribution business is to be treated as confidential. To facilitate compliance with this requirement, the licensee is required to "…establish and …maintain the full managerial and operational independence of the distribution business …from each other business …of the licensee and of its affiliates and related undertakings".⁸

2. Other requirements include:

• no access to premises, data systems, equipment, facilities or property used for the distribution business by any other business of the licensee.
• People who are no longer engaged in the management and operation of the distribution business are not allowed to be engaged in any other business of the licensee for at least 3 months.
• A statement must be prepared and kept up to date setting out practices, procedures and systems which the licensee has adopted to ensure its compliance with the relevant duties. The statement, and its updates, must be approved by the regulator (Ofgem).⁹
• Cross-subsidisation between the businesses of the licensee or of an affiliate or related undertaking of the licensee is also prohibited.

3. In several Australian states, such as Queensland and New South Wales, ring-fencing of network service providers has been introduced to ensure that businesses operating in regulated monopoly industries do not use their monopoly positions to influence outcomes in unregulated competitive markets.¹⁰

4. The framework under which New South Wales operates has three features:¹¹

• A high level statement prohibiting anti-competitive conduct
• A set of detailed, activity-focused default ring fencing guidelines; and
• A mechanism whereby the distributors could seek to alter the guidelines.

5. The guidelines require the distributor to:

• Provide distribution services and information related to independent service providers on terms no less favourable than the terms on which service is provided to the parts of the business which provide contestable service
• Allocate costs between monopoly and contestable activities on the basis of relevant, reliable and verifiable factors
• Let customers know that there is a choice of providers of contestable services

6. There are rules in the guidelines applying to operational tasks (for example, construction and inspection), i.e. functional separation. These include physical separation of offices, information separation, and staff separation.

7. The default guidelines are compulsory unless the regulator agrees to modify or waive them. However, the regulator recognises that the impact of ring fencing guidelines will differ depending on the circumstances of each individual firm. Distributors can therefore suggest alternative measures to those set out in the default ring fencing guidelines. The regulator will allow firms to adopt these measures if it considers the alternative approach will meet ring fencing objectives. Other stakeholders, such as customers or competitors are also permitted to seek to modify or add to ring fencing obligations of distributors in cases where existing guidelines did not provide adequate protection against certain forms of anti-competitive conduct.

8. The regulator assesses each proposed change against pre-established guidelines, which provide transparency and guidance for potential applicants. To decide whether or not to grant a waiver the regulator must conduct appropriate public consultation and may have regard to:

• the administrative costs of compliance for the distributor
• the distributor's ability to achieve economies of scale;
• the size of the relevant market;
• the extent to which competition will be diminished or enhanced if the waiver is granted or refused; and
• any other factors considered relevant.

9. Ring-fencing rules in Queensland have a similar objective: "…to assist in creating an environment where the price, quantity and quality of electricity traded in the retail market, and the price, quantity and quality of distribution services used to deliver the energy, are not uneconomically biased by the vertical integration of distribution and other businesses".¹² The guidelines are based on legislation that already requires legal separation between distribution and retail activities. In summary, the guidelines require a distributor to:

• not carry on a supply business within that legal entity;
• establish and maintain a separate set of accounts for the distribution services;
• allocate any costs shared between a distribution activity and any other activity, in a way that ensures there is no cross subsidy;
• ensure all confidential information provided by customers is used only for the purpose for which it was provided and is not disclosed without the approval of the customer or prospective customer who provided it:
• ensure all confidential information which might reasonably be expected to affect materially the commercial interests of a customer or prospective customer is not disclosed to anyone without the approval of that customer
• ensure that its marketing staff are not also staff of an associate that takes part in a related business.

10. A distributor is exempt from complying with some of the above if the arrangements under which it shares staff or if the information obtained by the distributor is disclosed to its staff in a manner consistent with protocols prepared by the distributor and approved by the regulator.

11. The regulator may require the distributor to comply with obligations in addition to the minimum obligations outlined above or add to or amend these Distribution Ring-Fencing Guidelines, provided that it is satisfied the distributor cannot demonstrate that the administrative cost to the distributor and its Associates of complying with the additional or altered obligations is, or is likely to, outweigh the benefit to the public.

12. The regulator may waive any of a distributor's obligations provided that the regulator is satisfied that the distributor can demonstrate that the administrative cost to the distributor and its Associates of complying with the obligation outweighs the benefit, or any likely benefit, to the public. A distributor must apply to the regulator for a waiver from obligations. When the regulator receives an application it must either:

• reject the application without further consideration if it considers that the application has been made on trivial or vexatious grounds; or
• in all other cases, within 14 days after receipt of the application, inform each person known to the regulator who the regulator believes has a sufficient interest in the matter that it has received the application by publishing a notice in a national daily newspaper and request submissions by a date specified in the notice.

13. A distributor must provide a report to the regulator, at reasonable intervals determined by the regulator, describing the measures taken to ensure compliance with its obligations under these Guidelines. This report, along with the regulator's assessment of compliance, is then made public. The regulator may, upon reasonable notice, require a distributor to appoint an independent auditor approved by the regulator to report on such matters.

14. From these examples we can see that other countries also have additional electricity industry specific guidelines separating different parts of the electricity sector, in addition to general competition legislation. For example, Australian states' ring-fencing guidelines impose similar requirements to New Zealand's arms length rules, and in the United Kingdom distribution and generation companies are separately licensed and need to meet specific requirements (with ongoing monitoring) to maintain their licence. So it is clear that other countries also are of the view that trade laws by themselves are not sufficient to prevent cross-subsidies and other monopolistic practices when companies that are natural monopolies enter a competitive part of the electricity market. New Zealand's requirement for arms length separation is in fact broadly consistent with regimes applied in other jurisdictions.