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• 5. Indicative Impacts

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42. Each option will create a range of impacts for each stakeholder group. This section seeks to broadly identify what impacts would result to each. The criteria for evaluation (section 2.5) will be applied to the outcomes (the collection of impacts) for each option.

43. If you think other impacts should be taken into consideration please set them out in your submission.

5.1 Continuance of obligation to maintain line function services with no expiry date

44. Subsection (6) of section 62 of the Act would be repealed, meaning that section 62 of the Act would no longer expire in 2013, and lines companies would be required to continue to supply line function services to those places supplied in April 1993 with no date of expiry.

Impacts

45. Lines companies – Assets will continue to be used that are not generating a commercial return. Over time the return will also decrease (and can be negative) and the cross subsidy in the network will continue and increase.

46. This would potentially increase costs (and therefore reduce the value of the business) for the lines company relative to the expiry of section 62 in 2013. The ability to cross-subsidise from other consumers would need to continue to be sanctioned, either by government policy statements or even by legislation.

47. A lines company could seek to improve the economics of lines supply to remote rural areas by replacing lines with lower cost technology (e.g. replacing 3-phase power with single phase) or using different supply contracts for less economic consumers (e.g. providing for lower reliability standards).

48. Lines companies would still be in a position to apply to the Minister for approval to disconnect the line, but would probably have to propose an alternative for supply.

49. Consumers – Remote, rural consumers on uneconomic lines would have certainty of supply. The price they could expect to pay for lines charges would depend on the evolution of future government policy regarding rural / urban pricing. The relative prices of lines services may differ between network regions as different networks have a different proportion of services to uneconomic areas.

50. If supply to these "uneconomic" areas is maintained this could increase the level of cross-subsidy required from other network users, particularly as lines begin to need significant upgrading. Preliminary information from lines companies indicates that the size of this cost on a per-consumer basis is likely to be small, but this could depend on the relative proportions of the economic and uneconomic segments of the network.

51. Market – If the requirement is to supply by lines with no expiry date, the market opportunities for suppliers and proponents of alternative supply systems would be very constrained and the potential for innovation and development reduced.

5.2 Continuance of supply, using lines or alternatives, with no expiry date

52. Subsection (6) of section 62 of the Act would be repealed, meaning that section 62 of the Act would no longer expire in 2013. Lines companies would be required to continue to supply either by lines or by alternative supply in perpetuity. Other parts of section 62 (when supply can cease temporarily) would also need to be redrafted.

Impacts

53. Lines companies – It is likely that there would be increased business and compliance costs for lines companies relative to the expiry of section 62 in 2013. Lines companies would be required to continue supply in some areas on assets that are not paying for themselves. If companies can supply by alternatives closer to load this may be a cheaper option, but even then the revenue may not be sufficient to recover the cost of supply.

54. Lines companies would be the party responsible for making the decision on how best to supply, but this could impact on the level of consumer involvement required if the company sought to deliver electricity by alternative means, including substituting for electricity by using other energy sources (e.g. bottled gas for cooking).

55. New business opportunities would eventuate as lines companies might be expected to develop new knowledge and expertise in respect of remote area power generation. Expertise could potentially be applied to other distributed generation solutions more generally in the network. However obtaining this knowledge and expertise would be costly and require time and commitment. Presumably companies would not invest in alternatives to lines unless it was more economic to do so.

56. Proposed changes to the Electricity Industry Reform Act 1998 will allow lines companies to own, maintain and sell generation (energy) in areas outside their own network areas.

57. Consumers – There would be greater certainty for consumers if the continuance of supply was maintained, but they might have to adapt to an alternative method of supply if that were more economic. Future prices would depend on the evolution of government policy regarding rural / urban pricing and whether the policy would apply to alternative methods as well as lines.

58. We expect that many consumers would prefer a subsidised lines supply with no maintenance responsibility rather than an alternative system that could require a greater level of change and ongoing involvement. However there may be consumers that want to take advantage of the opportunity to change and are interested in having greater control over their energy supply.

59. There would need to be consideration of the ongoing quality, reliability and capacity of supply and the amount that customers were willing and able to pay to be supplied with electricity. Other energy sources such as gas bottles and wood burners can substitute for electricity used for heating, but the responsibility for maintenance would fall to the consumer.

60. Market – Other market solutions and providers (e.g. retailers) may be cut out if lines businesses are responsible for supplying alternatives, but on the other hand the supply obligation could enable an alternatives market if lines companies contract out to suppliers to fulfil their obligation. However if the alternative supplier failed then it would still fall to the lines company to maintain connection.

5.3 Obligation to maintain line function services expires but lines companies provide advance information on intentions.

61. Under this option section 62 would expire on 1 April 2013 but lines companies would be obliged to provide notice to their customers if they intend a change in, or removal of, line supply to consumers.

62. This would require a modification to the Act to replace the continuance of supply by lines with a requirement that any proposed changes to line supply to pre-1993 consumers be notified and explained by lines companies.

Form of information requirements on lines companies

63. Listed below are potential ways that lines companies could provide information:

• Minimum notice period – lines companies could be required to provide a minimum advance notice period (e.g. 3 or 5 years) to stakeholders prior to removing supply by lines, to allow consumers time to implement alternative supplies.
• Type of information to be provided – lines companies could provide, for example, an energy audit for a consumer to identify alternative supply opportunities, or provide information and contact details for alternative suppliers.
• Degree of notification/contact with affected consumers – notification would first be done directly with consumers, and then possibly more widely via public forum, the press, or Internet website.

Impacts

64. Lines companies –They would no longer have a legal obligation to maintain line service function to connections established as at 1 April 1993.

65. We think it is likely that lines companies would initially continue to supply after 2013 on uneconomic lines, but when maintenance or upgrade costs become too high, or lines fail after a storm, there is a risk that they could choose not to repair / replace them.

66. Lines companies would face a small cost of providing information when intending a change in supply, but this would only occur if the company had identified that the supply change would be economically beneficial.

67. Consumers – Consumers are already expressing concerns about security of supply and affordability after 2013. Distribution assets could already be deteriorating if lines companies will no longer be legally obliged to maintain line function services into the future to uneconomic areas. Uncertainty around supply could reduce if lines companies are required to notify their intentions.

68. However being notified that supply conditions are changing would itself generate uncertainty regarding timing and costs of the new arrangements. Consumers might need to arrange their own method of electricity supply by alternative sources and would need to pay full costs, and also face ongoing requirements in terms of maintenance of systems, managing quality, and responding to system failure.

69. Consumers could form co-operatives to take over ownership and maintenance of lines to their properties. This would require lines companies to ensure that lines and associated fittings were at "a reasonable standard of maintenance or repair" before being transferred, as outlined in section 2(5) of the Electricity Act 1992.

70. Market – The market for alternative supply solutions and the potential for market innovation are very likely to be increased if the obligation to maintain supply is allowed to expire with conditions, but it depends on the demand from consumers for affordable and reliable systems, and what information is required to be provided by lines companies.

71. There is some prospect that hybrid supply arrangements could emerge, such as supply to a community of several houses using a generator in combination with a local "islanded" network (i.e. a network that is not connected to the distribution network).

72. There is also a potential opportunity for remote rural lines to be retained in order to transport and sell electricity generated in remote regions (by distributed generation), which would improve the economics of the line.

5.4 Obligation to maintain line function services expires but lines companies assist in transition to alternative supply.

73. This option would oblige lines companies to provide assistance to those customers they propose to disconnect after 2013 through managing a transition to alternative arrangements for electricity supply.

74. Section 62 of the Act would require modification to replace the current obligation to maintain line supply with an obligation on lines companies to assist consumers in a transition to alternatives where they propose changes to supply arrangements to customers connected on 1 April 1993.

Form of assisted transition obligations on lines companies

75. Potential obligations could include:

• Brokering / advisory function between consumers and alternative suppliers: Lines companies broker solutions / advise solutions between consumers and alternative suppliers.
• Installation of alternatives: Lines companies take an active role to ensure alternatives are installed, either by taking responsibility for installation, or by contracting for another supplier to install alternatives for consumers.

76. A decision would be required about the point at which such obligations would be discharged.

Impacts

77. Many of the costs and benefits of this proposal and impacts for stakeholders will be similar to the impacts outlined under the option above. In addition:

78. Lines companies – would face increased costs of compliance as they would be required to manage consumers to alternative supplies. However, it should be noted that lines companies are unlikely to remove lines unless the costs of doing so would be lower than the costs of continuing lines supply, so costs should be lower relative to any ongoing supply obligation.

79. Consumers – would face less uncertainty, as lines companies would be required to manage consumers on to a new form of electricity supply. However, in the longer term, consumers may still face some uncertainty after the lines company had discharged its obligation to provide connection to an alternative supply, as there is the potential for increased uncertainty about the respective roles and obligations of the lines company, the consumer and any other person involved in the transition arrangements.

80. For this reason, the requirements on lines companies and an exit strategy would need to be clearly defined, so consumers would be certain about who is responsible for ensuring continued electricity supply.

81. Market – This should increase the size of the market for the delivery of alternative supply solutions.

5.5 Continuance of obligation to maintain supply, using lines or alternatives, for a limited time beyond 2013

82. Section 62(6) of the Act would be modified to extend the date at which section 62 of the Act expires. This extension could last for a period ranging from five years (2018) to ten years (2023) or more. Together with an extension, changes could be made so that the Act would also include requirements for information and transition assistance as discussed previously.

83. Although this option would delay the expiry of section 62 of the Act, once the new expiry date was reached, stakeholders would face similar issues to those outlined under the status quo, unless an extension of the date for expiry of section 62 could be put in place together with one of the other options previously outlined.

84. However, an additional five to ten year transition may allow further time for development of alternative technologies to lines at a lower cost than currently, and time for consumers to prepare for change. As noted in section 7, costs of alternatives may decrease relative to the cost of supply by lines, especially if lines require investment.

Impacts

85. Lines companies would face increasing maintenance costs as lines are made to last even longer prior to expiry of the transition period. We think it unlikely that lines companies would invest in alternative supply options if there was uncertainty about what happens again at the end of the period.

86. Consumers An extension of the transition period would temporarily provide increased certainty for pre-1993 consumers, until the transition period again came close to expiry. However there could be increases in unreliability of supply as the use of lines that are already in need of replacement is extended for a few more years.

87. Market The incentives to supply and develop alternative systems may be stifled if the period is extended but there is uncertainty about what happens next. The removal of the continuance of supply by (subsidised) lines is a market driver for the ongoing development of alternative systems. The expected future reduction in costs of alternative supplies depends also on the extent to which markets overseas are taking up such systems.

5.6 Obligation to maintain supply, using lines or alternatives. with no expiry date subsidised by all electricity users

88. This would be a regulatory framework which would require a new legal instrument to fund the ongoing subsidy of electricity services to consumers connected to lines as at April 1993.

89. The cost of subsidizing commercially non-viable services would be levied on the electricity industry, and would ultimately be recoverable through retail electricity charges. This would change the incidence of subsidy from users within a distribution network to users across all networks (i.e. socialisation of the costs of supplying uneconomic regions).

Impacts

90. Government – There would be (as yet unquantified) costs to set up and administer such a new scheme. The costs are expected to be significant. The legal mechanism could be similar to that used in the past (a levy on electricity sales) and administered by a government body (previously the RERC).

91. Consumers – Consumers in remote rural areas would have certainty that electricity supply to connections as at April 1993 would be maintained. The supply method employed by the lines company would alter the level of involvement required by them. Most consumers of electricity would be subsidising the small proportion of users on uneconomic lines (around 16,000 consumer connections were made on 17,000 kilometers of line using RERC subsidy).

92. Lines companies – Those with a sizeable proportion of lines built using RERC subsidy may benefit from a scheme whereby the costs of maintaining those connections could be recovered from a wider base than just the company in question. Such a scheme would be likely to introduce further administrative cost for all network companies as they would need to demonstrate the areas to which a subsidy would be applied.

93. Market – Other market solutions and providers (e.g. retailers) may be cut out if lines businesses are obliged to take on an expanded role of supplying alternatives in perpetuity. However, there may be an increased demand for alternative supply systems if lines companies adapt their business model to accommodate alternative supply methods.