Part One: Mid-1980s to 1993
1. Start Point: Mid-1980s
Electricity generation and transmission were amongst the responsibilities of a Government Department, the Ministry of Energy. This Ministry was also responsible for policy advice and regulatory functions. There was extensive political involvement in generation investment decisions, project management was not accorded attention that meets current standards, wholesale pricing was (at least in part) determined by political factors, and some supply shortages emerged.
In 19851 local distribution and supply were the responsibility of sixty-one electricity supply authorities (ESAs)2 - (there were ninety-three in 1945). These were electorally oriented, statutory monopolies. Inefficiency, lack of customer choice and cross-subsidies resulted.
This set of circumstances coincided with increasing concern about New Zealand's overall economic performance. In turn, this concern led to introduction of wide-ranging micro-economic reforms, more predictable macro-economic policy formation, and strengthened public sector accountability arrangements. Outcomes sought included economic growth through efficient resource use, driven by clearer price signals, and, where possible, by competitive markets.
In the early 1980s, a major inter-departmental review of the Crown's role in the electricity industry was commenced, looking to separate operational from other functions, and to improve commercial performance and introduce commercial disciplines for trading activities.
2. 1986: First Government Decisions on Electricity Reform
The Government announced its decision to reform its trading activities, including the generation and transmission sectors of the electricity industry. In addition, an inter-departmental committee was set up to develop and co-ordinate distribution reforms.
3. April 1987: Electricity Corporation of New Zealand Ltd (ECNZ) Set Up
ECNZ was set up as a company under the State-Owned Enterprises (SOE) Act, to own and operate the generation and transmission assets of the Ministry of Energy. Policy and regulatory activities were separated out and largely retained in the Ministry of Energy.
The SOE Act was a component of the Government's moves to improve the performance and accountability of the public sector. SOEs are companies in which nominated Ministers hold all the shares, and the enterprises negotiate annual Statements of Corporate Intent (SCls) with shareholding Ministers. SOEs operate with commercial structures and incentives and with the principal objective of being successful businesses.
4. April 1987: ESAs Subject to Income Tax
ESAs were subject to income tax from the year beginning 1 April 1987.
5. December 1987: Electricity Task Force Announced
The Task Force comprised members from Government departments, ECNZ and ESAs. Terms of reference involved advising the Government on the structure and regulatory environment for electricity industry.
6. January 1988: Electricity Amendment Act 1987 Came into Force
The Electricity Amendment Act 1987 came into force on 1 January 1988, removing the need for the Minister of Energy to approve all new hydro generation proposals.
7. April 1988: Transpower Set up as a Subsidiary of ECNZ
ECNZ organised its activities so that Transpower was set up to run the transmission network as a subsidiary of ECNZ, which became solely a generator.
8. September 1989: Task Force Recommendations Announced
The Task Force's key recommendations were:
- Separate ownership of generation and transmission.
- No large scale break-up of generation.
- Further study of limited generation break-up and creation of wholesale market (subject to this, ECNZ to be privatised).
- Transmission to be owned by club of generators and distributors.
- ESAs to be corporatised and privatised.
- Removal of statutory franchise areas and obligation to supply.
- The development of a light-handed regulatory regime, drawing on the Commerce Act 1986 supported by public information disclosure.
9. January 1990: Ministry of Commerce Assumed Remaining Roles of Ministry of Energy
The Ministry of Energy was abolished with effect from December 1989. That Ministry's policy, regulatory and other non-commercial roles were transferred to the new Energy and Resources Division (now incorporated into the Resources and Networks Branch and the Operations Branch) of the Ministry of Commerce (now the Ministry of Economic Development). A small number of residual and transitional Ministry of Energy commercial responsibilities were transferred to The Treasury.
10. May 1990: Government Decision on Corporatisation of ESAs
The Government announced that ESAs would be corporatised. Boards were to be owned by local trusts. MEDs (Municipal Electricity Departments, owned by territorial authorities) were to remain in local authority ownership.
11. July 1990: Transpower Establishment Board Set Up
An Establishment Board was set up with a brief to oversee setting up Transpower as a separate corporate entity from ECNZ, with a plan for club ownership of Transpower. The Board's brief was subsequently widened to consider other ownership forms.
12. August 1990: Electric Power Boards Amendment Act 1990 Passed
The Government appointed commercial directors to Electric Power Boards with effect from October 1990. Existing Board members became trustees, and were to hold shares when the Boards were corporatised. Trustees were subsequently to be elected.
13. June and September 1991: Transpower Establishment Board Reported
In its report to the Government, the Establishment Board recommended ownership of Transpower by a "club" of ESAs and generators. The Board also recommended a process for separation of Transpower from ECNZ (including valuation, gearing and pricing).
14. 1991: Energy Sector Reform Bill Introduced to Parliament3
This Bill contained provisions facilitating the corporatisation of ESAs and a wide range of regulatory measures.
There was extensive public debate about the appropriate ownership of ESAs. The Bill provided for polls of local consumers (in the case of Electric Power Boards) and ratepayers (in the case of MEDs) to determine appropriate share distributions.
The Bill was later split to become five separate Acts, including the Energy Companies Act 1992 and the Electricity Act 1992.4
15. 1992: Parliamentary Report on Wholesale and Retail Electricity Pricing
A Parliamentary Committee reported that it had found no justification for wholesale price rises proposed by ECNZ, they advocated increased efficiency in retail pricing.
16. May-July 1992: Electricity Shortage
On 6 May ECNZ issued a press release advising of the effect of drought on South Island hydro storage lake levels and outlining actions being taken to conserve storage.
With the level of inflows to the lakes dropping further the situation deteriorated to such an extent that by 5 June voluntary savings of 10% of demand were called for.
A combination of electricity savings by the public and generation initiatives by ECNZ continued into July when water inflows to the South Island lakes began to increase. On 7 August the power savings were called off.
17. June 1992: Officials Committee on Energy Policy (OCEP) Set Up
OCEP was given the task of co-ordinating energy policy advice to Government, replacing previous inter-departmental committee arrangements on energy policy issues.
18. June 1992: Energy Policy Framework Confirmed
The Government confirmed its energy policy framework:
The Government's key objective in the energy area, is to ensure that energy services continue to be available at the lowest cost to the economy, consistent with sustainable development.
This will be achieved by the efficient and effective provision of energy services through properly functioning commercial systems with competitive incentives. These systems will work within an effective and stable regulatory environment and take energy conservation into account.
Note: a new Energy Policy Framework was released in 2000 (see section 51).
19. July 1992: Energy Companies Act 1992 Came into Effect
This Act provided for the corporatisation of the ESAs. Ownership of Boards5 became the subject of share ownership plans that were incorporated in establishment plans, and which took account of views expressed in local consultations. Trustees were to consider the share allocation plans. The Minister of Energy was to approve the establishment plans (the Minister's role in regard to ownership was to ensure that the prescribed process was carried out).
Diverse ownership patterns resulted. Broadly:
- Trust ownership was most favoured.
- Majority private shareholding resulted in some cases.
- MEDs and a small number of boards were owned by local government.
- Many combinations of the above.
20. October 1992: Wholesale Electricity Market Study (WEMS) Released
At this point it was clear that generation reform and the creation of wholesale market arrangements had been given less attention than distribution and retailing. More concerted attention was therefore given to the generation sector.
WEMS was a private sector initiative. The study recommended a major evolution of existing market arrangements to provide a predictable price path for wholesale electricity, and to enable some trading at marginal prices. Competition with the dominant generator ECNZ was envisaged.
21. October 1992: WEMS Critique Announced
The Government sought independent review of WEMS report.
22. October 1992: Energy Efficiency and Conservation Authority (EECA) Set Up
The Government set up EECA to develop, implement and promote strategies to improve energy efficiency.
23. February 1993: WEMS Critique Completed
The critique was presented to the Government. It identified five areas for further development:
- Pricing of tradable contracts.
- Ground rules of market operation, with the threat of heavier regulatory oversight.
- Oversight of the performance of the wholesale market in improving energy efficiency.
- Need for wider review of the wholesale electricity market proposals, including by parties not involved in WEMS.
- Possibility of evolutionary development if one-step introduction of new arrangements turned out to be impracticable.
24. April 1993: Electricity Act 1992 Came into Effect
The Act provided for:
- Deregulation (the removal of distributors' statutory monopolies and of the obligation to supply).
- Information disclosure, focused particularly on natural monopolies.
- Temporary provision for price control for domestic consumers.
- Safety matters.
- Land access.
- Role and wind up of Rural Electrical Reticulation Council (RERC).6
- Compulsory maintenance of line services until 2013 (20 years).
25. April 1993: First Franchise Removal
This was the first stage of removal of statutory distribution and retail monopolies (and the obligation to supply), allowing competition for sales to retail consumers.
Franchise restrictions were removed for small consumers first (i.e. under 0.5 GWh per annum); to avoid the possibility that they might face the costs of a cross-subsidy, since competition for larger consumers was expected to be stronger.
26. May 1993: Transpower Separation Announced
Government announced the decision to separate Transpower from ECNZ. Club ownership was seen as difficult to implement, so the Government decided to set Transpower up as a stand-alone Crown-owned company. Special legislation would be required.
27. June 1993: Wholesale Electricity Market Development Group (WEMDG) Established
The Government announced its decision to establish the Wholesale Electricity Market Development Group (WEMDG).
The Group's terms of reference included the development of specific, cost effective proposals for developing a wholesale electricity market that, consistent with sustainable development, would ensure that wholesale electricity is delivered at the lowest cost to the economy.
WEMDG comprised a range of representatives from interested parties (including a new entrant generator and consumers). The process was to include wide consultation. Some Government funding was provided, and two Government observers attended.
28. June 1993: Government Announced Policy on Renewable Energy
Framework objective:
To facilitate the development of cost-effective renewable energy consistent with the Government Energy Policy Framework.
The Government's energy sector reforms were seen as a good basis for encouraging renewables. Enhancements of the opportunities for the cost-effective application of renewable energy were announced, including work on identification of the barriers to renewable energy.
29. 1993: Electricity Market Company Ltd (M-co) Set Up
The Electricity Market Company (subsequently renamed The Market Place Company ) was set up, to support the electricity market framework for wholesale trading.
Key steps included:
- Commencement of an on-line secondary market in trading of ECNZ's hedge contracts, including provision of market information.
- Establishment of a market surveillance committee to admit new entrants and supervise conduct.
- Administration of the Metering and Reconciliation Information Agreement (MARIA) to record and reconcile flows to meet the needs of parties contracting in the wholesale and retail markets. Under the MARIA agreement, Transpower, as National Reconciliation Manager, reconciles information against contracts and passes information for billing back to market participants.
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