Part Two: 1994 to 2001
30. April 1994: Second Franchise Removal
This was the second stage of removal of statutory distribution and retail monopolies (and the obligation to supply), allowing competition for supply to all consumers. Small consumers (i.e. under 0.5 GWhpa) had been contestable since April 1993. In this second stage, franchise restrictions were removed for larger consumers.
31. April 1994: Transpower Separation - Second Announcement
The Government amended its announcement of May 1993, preferring to set up Transpower as a stand-alone SOE. The separation of Transpower from ECNZ took place on 1 July 1994.
32. July 1994: Information Disclosure Regulations Promulgated
The Electricity (Information Disclosure) Regulations (Revised 1999) (subsequently revoked on 6 April 2004) came into force. These regulations require public disclosure of:
- Separate audited financial statements for natural monopoly and potentially competitive businesses (and methodologies).
- Prices and other main terms and conditions of contracts.
- Financial performance measures, based on standard asset values (ODV7) and with removal of any elements of double counting of asset related expenditure.
- Efficiency and reliability performance measures.
- Costs and revenues by tariff category (and methodologies).
- Line charges (and methodologies).
33. August 1994: WEMDG Report to Government
The draft WEMDG proposal was published in March 1994.
In its final report (August 1994), WEMDG recommended:
- Earliest establishment of competitive wholesale market.
- Sale of most electricity under long term, tradable contracts.
- Establishment of a voluntary pool and spot market, operated by a neutral entity.
- Independent Transpower.
- Steps to stem ECNZ's dominance, including progressively leasing approximately 40 per cent of ECNZ's plant and constraints on new investment.
- Levy to promote energy efficiency and conservation.
34. June 1995: Wholesale Electricity Market Announcements
The Government made its provisional announcements on the steps it would take in the lead up to the opening of the wholesale electricity market:
- ECNZ to be split into two competing SOEs (ECNZ and Contact Energy 8).
- ECNZ's Maui gas contract to be transferred to Contact Energy.
- ECNZ's proposals for new Taranaki plant to be sold (including associated gas supply).
- Six small hydro plants owned by ECNZ to be sold.
- Remaining assets of ECNZ and Contact Energy not to be sold.
- Special constraints on ECNZ to apply until its market share fell to 45% (cap on building new capacity, ring-fencing new capacity, and high level of firm capacity to be offered by tender for long-term contracts).
- Five year fund of $18 million to support energy efficiency in the domestic sector.
35. November 1995: ECNZ Restructuring Confirmed
The Government confirmed its June 1995 wholesale electricity market decisions, following consultations with Maori and confirmation of the viability of ECNZ's restructuring and the reform timetable.
36. February 1996: Contact Energy Commenced Operations
Contact Energy commenced operations as an SOE generator, in competition with ECNZ. Contact Energy took on the former ECNZ power stations at Roxburgh, Clyde, New Plymouth, Wairakei, Ohaaki, Otahuhu, Stratford and Whirinaki, which represented 22% of total electricity production. Contact Energy also took over ECNZ's contracts for Maui gas.
A set of special restraints was applied to ECNZ until such time as its market share fell below 45% (see section 35).
37. June 1996: Government Signalled Future Direction for Regulation of Telecommunications, Electricity and Gas
An extended legal dispute over interconnection pricing in telecommunications had culminated in a Privy Council decision endorsing a pricing rule (Baumol-Willig) which - in the Government's view - had the potential to lessen competition. This legal outcome prompted the Government to reappraise light-handed regulation of vertically integrated monopolies.
In June 1996, the Government confirmed its reliance on competition to achieve efficiencies in telecommunications, electricity and gas services in order to promote user benefits. At the same time, however, it declared its resolve to take additional regulatory action if it was not satisfied that vertically integrated network owners and potential competitors were negotiating in good faith to arrive at commercial solutions in a timely manner.
38. October 1996: The Wholesale Electricity Market Commenced Operations
The competitive wholesale electricity market started under a multilateral contract - the New Zealand Electricity Market (M-co and the New Zealand Electricity Market [23 kB PDF]). M-co was contracted to act as Market Administrator, Clearing Manager and Pricing Manager, Transpower took the roles of Scheduler and Dispatcher.
Electricity prices are based on bids and offers from market participants (i.e. generators, purchasers and traders), and the price is not capped. The spot market is supplemented by trading of longer term hedge contracts.
39. September 1997: Revised Objectives for Transpower
Transpower's objectives were revised to more strongly emphasis the need for it to continually improve the efficiency of transmission services, by making the services contestable wherever possible and producing customer driven services at least cost. The key outcome sought by the Government was to reduce transmission costs as a percentage of total electricity costs on a sustainable basis.
Transpower initiated a review of the way grid security standards are set and maintained by establishing the Interim Grid Security Committee (IGSC), chaired by Honourable David Caygill. It was charged with developing a conceptual framework for grid security policy (GSP) consistent with a Government policy statement on the matter.
This involved establishing a self-governing arrangement for the industry for setting standards for common quality including security, a contractual structure for implementing agreed common quality standards and a robust monitoring, compliance and dispute resolution process. This work was to be incorporated in the proposed Multilateral Agreement on Common Quality Standards (MACQS).
40. April 1998: Electricity Generation, Distribution and Retail Reforms
The Government announced a package of reforms to generation, distribution and retail. The outcomes sought were vigorous competition wherever possible and effective regulation of natural monopoly businesses. Key features:
- Decision, in principle, to split ECNZ into three SOEs - Huntly and Tongariro; Waikato hydros; Waitaki and Manapouri.
- Ownership separation of line and energy businesses.
- Lines businesses, which do not face competition, to face increased risk of price control if they do not deliver best possible prices to consumers.
- Strengthening the Electricity (Information Disclosure) Regulations 1994 and the ODV handbook for valuing lines businesses.
- The government to publish improved analysis of disclosed information to enable better comparisons of the performance of power companies.
- The industry to establish low cost switching arrangements to enable customers to change retailers; the government to introduce a mandatory default system if the industry failed to deliver within 12 months.
41. July 1998: Electricity Industry Reform Act 1998
Under the Act, corporate separation of lines and energy businesses was to be achieved by 1 April 1999 (the separation was in fact completed more quickly than expected see section 46), and full ownership separation no later than 31 December 2003.
42. September 1998: Government Decision to Sell Contact Energy
The Government announced its decision to scope the sale of state-owned generator Contact Energy. Contact Energy was reported to have a book value of $860 million.
In March 1999 the Government announced the sale of a 40% cornerstone shareholding in state-owned generator/retailer Contact Energy to United States-based Edison Mission Energy for $NZ1.208 billion.
The Government subsequently sold its remaining share of Contact Energy in May 1999, to more than 225,000 investors at $NZ3.10 per share. The Government's revenue from the sale of Contact Energy, including the 40% sold in March 1999 to Edison Mission Energy, was more than $NZ2.3 billion.
43. April 1999: ECNZ Split
New Zealand's largest electricity generator - state-owned enterprise ECNZ - was split into three competing state-owned generators. The new companies, which commenced trading on 1 April 1999 are:
- Genesis Power Ltd (based in Manukau City, owns the Huntly and Tongariro power stations and owns existing electricity retailer First Electric);
- Meridian Energy Ltd (based in Wellington, owns the South Island's Waitaki and Manapouri power stations); and
- Mighty River Power Ltd (based in Auckland, owns the Waikato Hydro system).
44. April 1999: Separation of Ownership of Electricity Line and Supply Businesses Completed
The Electricity Industry Reform Act 1998 required electricity companies to separate ownership of their line and supply businesses by 31 December 2003, and to undertake interim corporate separation by 1 April 1999. In the event, the industry chose to move more quickly, completing ownership separation before 1 April 1999. At that date, there were 7 retailers, many owned by generators (including the three SOE generators). Merger activity over the period of ownership change was less pronounced among line businesses, of which there were 32 on 1 April 1999.
45. April 1999: Inauguration of System for Switching Electricity Retailers
The electricity industry launched a profiling system that enables consumers to switch electricity retailers easily. The system is part of MARIA and administered by wholesale market administrator The Marketplace Company Ltd (M-co). The ability for consumers to switch retailers was a requirement of the Government's 1998 electricity reforms.
46. April 1999: Revised Information Disclosure Regulations Promulgated
The Electricity (Information Disclosure) Regulations 1999 (subsequently revoked on 6 April 2004) came into force, replacing the 1994 version of the regulations. The new regulations:
- removed disclosure requirements from retailers and generators;
- tightened rules for accounting and for calculating performance measures;
- introduced new measures of reliability performance;
- required line owners to disclose asset management plans and security standards, as recommended by the Ministerial Inquiry into the Auckland Power Failure; and
- provided for much disclosed information to be made available on the Internet.
47. November 1999: Industry Self-Governing Arrangements for Grid Security
Following authorisation by the Commerce Commission of the Multilateral Agreement on Common Quality Standards (MACQS) in August 1999 and signing of MACQS by industry participants, the Grid Security Committee (GSC) was formed in early November 1999. The GSC consists of an independent chair (Honourable David Caygill), three elected representatives from generators, an elected representative from retailers and a representative each from of the group of local networks, grid owners, domestic end user group, commercial end user group and industrial end user group.
The functions of the GSC are to: evaluate proposals to change parts of MACQS; oversee the Common Quality Co-ordinator contracting arrangements; admit members to MACQS; appoint mediators and arbitrators for disputes; carry out or participate in certain reviews and perform other such functions and tasks as given to the GSC under MACQS.
48. February 2000: Electricity Industry Inquiry Announced
The Government announced a Ministerial inquiry into the electricity industry on 3 February 2000. The Terms of Reference for the Inquiry chaired by the Honourable David Caygill required it to consider what changes were needed to ensure New Zealanders have the best possible electricity system. The Inquiry was asked to focus on distribution and retailing, the wholesale market and the transmission grid.
49. June 2000: Electricity Industry Inquiry Report Released
The Ministerial Inquiry into the Electricity Industry reported to the Government on 12 June 2000 and their report was subsequently publicly released.
The Inquiry panel supported continuation of the self-regulation approach, but recommended further evolution of the existing arrangements in the electricity industry as well as introduction of targeted price control for electricity lines businesses.
50. October 2000: Power Package Released
The Government's decisions on electricity sector reform were announced in the "Power Package" on 3 October 2000. These announcements followed the Ministerial Inquiry into the electricity industry - recommendations from which were broadly accepted, either directly or in a modified form.
The Government stated that it favoured industry solutions where possible with regulation only where necessary. A draft Government Policy Statement was released outlining the Government's expectations for further evolution of the self-regulatory arrangements in the electricity industry.
The Government announced it would introduce legislation which would enable it to make regulations if necessary if the governance board fails to deliver.
51. October 2000: Energy Policy Framework Released
A revised Energy Policy Framework was released. The Government’s overall objective is: "to ensure the delivery of energy services to all classes of consumers in an efficient, fair, reliable and sustainable manner."
52. November 2000: Electricity Industry Bill Tabled in Parliament
The Electricity Industry Bill was tabled in Parliament on 28 November 2000.
This was an omnibus bill to amend various Acts to give effect to the Government's response to the recommendations of the Ministerial Inquiry.
53. December 2000: Government Policy Statement Released
Following consultation with industry participants, a "Government Policy Statement (GPS): Further Development of New Zealand’s Electricity Industry" was released on 7 December 2000. The Statement was transmitted to the Commerce Commission under section 26 of the Commerce Act (Commission to have regard to economic policies of the Government) on 14 December 2001.
This Statement requires the electricity sector to establish a new electricity governance board: to develop rules for the industry in areas specified, consistent with the Guiding Principles outlined. The Statement includes other requirements on the industry.
The GPS was revised in February 2002.
54. Electricity Governance Establishment Committee established
An Electricity Governance Establishment Project (EGEP) was established, and a committee appointed in October 2000 in response to the Government’s request, set out in the Government Policy Statement, that the industry put in place a single self-governance structure. The Committee is working to create a single governance structure for the electricity industry, which will bring together the three existing industry governance structures (NZEM, MACQs and MARIA), and to establish an Electricity Governance Board.
55. August 2001: Electricity Industry Bill Passed
The Electricity Industry Bill 2000 was enacted on 7 August 2001. The Bill amended four statutes (the Ministry of Energy Abolition Act 1989, the Commerce Act 1986, the Electricity Act 1992, and the Electricity Industry Reform Act 1998).
Key features of the legislation are:
- Commerce Amendment Act (No. 2) 2001 amendments:
- the Commerce Commission may control the price or revenue of electricity line businesses which breach thresholds set by the Commission (no Ministerial decision on control is involved);
- the Commerce Commission will take over the administration of the electricity information disclosure regime including a review of the appropriate asset valuation methodology.
- The Electricity Amendment Act 2001:
- allows the Government to establish by Order in Council as a Crown entity, an Electricity Governance Board, if negative reports are received on the governance board established by electricity sector; or if the industry is unable to establish a governance board
- provides the Government with the power to make regulations on a number of matters, including: requirement to provide domestic consumers with a low fixed charge tariff option; electricity governance; a complaints resolution system; hydro spill; and hedge prices.
- Electricity Industry Reform Amendment Act 2001:
- The rules on ownership of electricity generation by lines companies have been slightly relaxed, including enabling unlimited ownership of renewable generation.
56. July-September 2001: Supply Shortage
Low lake levels, coupled with unusually high demand for electricity caused a shortage of electricity in the winter of 2001. Wholesale electricity spot market prices rose sharply as a result.
As uncertainty in electricity supply and wholesale prices increased, the Minister of Energy initiated industry meetings from 29 July through 8 September. During this period the Government implemented a conservation campaign calling for a 10% saving in electricity usage for 10 weeks for the public and a 15% saving for the government sector. This initiative, along with temporary relaxation of transmission security and greater use of thermal generation, ensured supply was maintained without interruption.
57. September 2001: Post-Winter Review
After the risk of power shortages was averted, the Minister of Energy announced on 10 September 2001 a review of the way New Zealand's electricity system functioned over the winter of 2001.
The main conclusions drawn from the review, announced on 11 December 2001, were:
- The electricity price spot market worked much as expected during winter 2001, with very high prices signalling an increasingly tight supply situation and record demand.
- The market would have worked better if the reforms specified in the Government Policy Statement (see section 54) had been fully implemented (such as improved information disclosure, demand-side participation in the market, and mechanisms to invest in the grid to relieve transmission constraints).
- Some major retailers and large users were seriously under hedged against dry-year spot prices. Although hedges were available, several years of surplus generating capacity and record low spot prices affected buyers' assessments about investing in hedges.
- As a consequence of experience in 2001, increased awareness of dry-year risk is likely to result in better risk management. More sophisticated (and liquid) hedge and contracting arrangements are likely to emerge.
- New Zealand is facing the need to build new generation capacity in the next few years to meet rising demand. This means that wholesale market prices on average are likely to trend towards long run marginal cost (LRMC) which is set by the cost of new generating capacity. This will also lead to upwards pressure on retail prices, as retail margins adjust back to long-term averages.
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