Regulatory Impact Statement
Executive summary
The Government Policy Statement (GPS) on Electricity Governance is made pursuant to s172ZK of the Electricity Act 1992. It sets the objectives and outcomes the Government wants the Electricity Commission (the Commission) to give effect to in relation to the governance of the electricity industry.
The purpose of the GPS is to give greater direction to the Electricity Commission on how it should meet its objectives to implement Government policy, over and above what is provided in the general purpose statements of the Electricity Act 1992. These objectives and outcomes provide greater detail on what the Government expects from the Electricity Commission in relation to consumer protection, electricity efficiency, renewable energy, security of supply, system operation and wholesale markets, transmission, distribution, distributed generation and retail.
The proposed revisions to the GPS are intended to facilitate the accelerated grid upgrade work that Transpower is proposing to undertake, by encouraging the Electricity Commission to develop a streamlined process for the approval of smaller transmission investments.
Adequacy statement
The Ministry of Economic Development (MED) confirms that the Code of Good Regulatory Practice and the regulatory impact analysis requirements, including the consultation RIA requirements, have been complied with. A RIS was prepared and MED considers the RIS and the RIA analysis undertaken to be adequate. A final RIS was circulated with the Cabinet paper for departmental consultation purposes.
MED notes consultation was not supported by a discussion paper covering a wide range of options to the proposal. However, submitters did identify a number of options which were analysed and assessed in the development of the final proposal. MED therefore believes that the RIA analysis requirements have been adequately fulfilled.
Status quo and Problem
The GPS is made pursuant to the Electricity Act 1992 and sets out the objectives and outcomes the Government wants the Electricity Commission to give effect to in relation to the governance of the electricity industry. The GPS includes the Government's objectives and expectations for investment in and maintenance of the transmission network.
At present all transmission upgrade works above $1.5 million must be approved by the Electricity Commission under Section III, Part F of the Electricity Governance Rules (otherwise Transpower will not be entitled to recover from transmission customers the costs of the works under the Commerce Act (Transpower Thresholds) Notice 2008). The costs and content of Transpower's maintenance and replacement and refurbishment programmes (including Transmission upgrade works under $1.5 million) are regulated by the Commerce Commission under the Commerce Act (Transpower Thresholds) Notice 2008.
Transpower reports that it currently has plans for 28 upgrade projects valued at less than $20 million over the next 12 months, and 79 over the next 5 years. Of these 79 upgrade plans over the next 5 years, 35 are valued at less than $5 million. These low cost projects typically relate to things such as the installation of new interconnecting transformers, new bus zone and circuit breaker protection, and thermal upgrading of existing lines. Transpower considers that many of these projects are necessary to ensure on-going risks to security of supply are minimised.
Transpower reports that it currently takes between 3-9 months for it to prepare a grid upgrade plan for even low cost upgrade proposals, with a subsequent 2-6 months for regulatory approval by the Electricity Commission. Transpower contends that it is the application of the Rules, in particular the Grid Investment Test, to minor investment works that gives rise to substantial delays in applying for and obtaining regulatory approval, and that this level of scrutiny and analysis is inappropriate for such minor works.
Objectives
The objective of the GPS change is to signal to the Electricity Commission the need to accelerate prudent grid investment by putting in place a streamlined process for the approval of grid upgrade proposals by Transpower which will have an expected cost of less than $20 million. The Government's primary objectives are to ensure security of supply by enabling grid investment to be approved more quickly, and to reduce unnecessary regulatory costs.
Alternative options
An option is to amend the GPS through having a less prescriptive, outcome focussed description of what is required in the GPS. This would allow the Commission to consider other options, including whether a process can be established within the framework of the Grid Upgrade and Investment Review Policy (GUIRP). It would also be more consistent with the intent of the rule change process in the Act.
However, a risk with this option would be that any resulting changes to the rules or to the Commission's process would not sufficiently reduce the time taken to have projects approved.
Consideration of retaining the status quo was also considered. The Government has a longer term objective of improving the regulatory arrangements that govern the Electricity Commission, Transpower and the Commerce Commission. This objective is being pursued through a review in 2009 of the electricity market and electricity governance and institutional arrangements by a Ministerial Working Group. This review is likely to report back after August 2009 with implementation of recommendations intended in late 2009 and early 2010.
The proposed amendments to the GPS are seen as an interim step in order to ensure current transmission investment projects can progress more quickly. The smaller transmission investments that will be facilitated by this policy are intended to provide much-needed stimulus to regional economies over the months ahead. Accordingly, more wide-ranging alterations to the regulatory approval scheme for transmission investments were not considered until the Government's intentions in this sector are known
Preferred option
The preferred option adds to the GPS the new concept of a minor transmission work. This is done by adding a new sub-part to the GPS in the transmission part (part 7). A minor transmission work is a planned investment or grid upgrade work with an expected cost of less than $20 million.
Under this revision Transpower will continue to develop and submit grid upgrade plans for minor works. The objectives for investment in and maintenance of the network will remain the same, but the Commission approval process for minor transmission works is simplified.
The key features of the new streamlined process for minor transmission works are:
- Transpower must prepare an upgrade proposal that meets minimum reliability standards, and is supported by an appropriate level of economic analysis;
- Transpower then must consult on the proposal and consider feedback;
- The Commission will approve the proposal once Transpower has consulted with stakeholders.
Costs and Benefits
One benefit of a more streamlined process for the assessment and approval of small transmission projects would be lower administrative costs for Transpower, the EC and consulted parties. Savings are expected to arise largely from reduced time to complete the streamlined process and may include:
- reduced risk of delay in proceeding necessary maintenance, replacement and refurbishment of the grid arising from delay in obtaining regulatory approval for small works; and
- improvements in Transpower's resource planning through more efficient allocation and better coordinated programmes of work, for example whereby small projects are completed earlier, allowing inter-linked larger projects to be bought forward because restricting constraints have been removed or relaxed.
Further indirect savings could arise from increased security and reliability of the grid, and from the avoidance of transmission constraints providing increased business confidence.
Such expected future savings are difficult to quantify, although Transpower has provisionally estimated that the streamlined process will save between $3-11 million per year (based on its current work plan). These figures though have not been verified by independent analysis.
The streamlined process reduces regulatory scrutiny of small transmission investments. There is a potential risk therefore that an unnecessary or insufficiently justified project could be undertaken that previously would have failed the regulatory test. Further there is a risk (raised by some submitters during consultation) that larger projects could be deliberately broken down into smaller sub $20 million projects to avoid regulatory consideration.
However, the new streamlined process retains many of the existing safeguards and incentives that ensure that Transpower meets minimum grid requirements and minimises its investment costs. The risk of imprudent or unnecessarily expensive grid investments is mitigated by requiring Transpower's minor investment works to continue to meet standards of GEIP and minimum reliability standards for core grid assets.
In addition to these regulatory safeguards, the requirement to consult (which is retained in the new GPS) should reveal in a public forum any substantive issues not already identified and accounted for in Transpower's proposal.
Lastly, Transpower will continue to be subject to regulatory oversight by the Commerce Commission.
On balance, the benefits of a more streamlined process for small projects (i.e. lower cost for Transpower, the EC and other consulted parties) are expected to exceed the potential costs (i.e. of less prudent investment by Transpower attributable to the lower level of scrutiny).
Implementation and review
The Electricity Commission will need to develop and recommend amendments to the Electricity Governance Rules to implement the new policy objectives set out in the revised GPS. Electricity Governance rules are made by the Minister of Energy and Resources following a recommendation from the Electricity Commission. The Minister of Energy and Resources may not amend those rules, except in response to a recommendation from the Commission
Consultation
The Electricity Commission, Treasury, EECA, DPMC and the Commerce Commission were consulted on this paper.
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