Scope of Ringfence
- Comalco's key concern with Part 10 is the limited scope of the ringfence. Parts C and G are not the only Parts of the EGRs that may conflict with the Comalco agreements, add risk and cost to the Comalco parties, or treat a Comalco party unfairly (for example by allocating it costs currently borne by another Comalco party).
- On 14 November 2003 the ECEU published on its website a public policy background paper. Comalco does not take issue with the public policy approach to Part 10. However, there is nothing in that public policy which dictates, or has to dictate, limiting the ringfence to Parts C and G only. We elaborate below.
Requirement to Comply with Rules
- Regulation 199 requires that the Comalco parties comply with the rules in the first instance. A Comalco party may only depart from the rules where that is reasonably believed necessary to perform an obligation, or exercise a right or power, under the Comalco agreements.
- In other words, the Comalco parties are required to comply with the rules, unless and except to the extent required or permitted by the Comalco agreements. This limitation of itself provides the necessary check on any Comalco party's non-compliance with the rules. A wholesale, across the board disregard for the rules will simply not be possible because the overarching principle is "must comply". The only exception is where the Comalco agreements provide otherwise.
- Further, checks ensure that the Comalco parties are subject to oversight and third party control. These include disclosure to the Board of the Comalco agreements, notification of acts or omissions and an assessment by the Board as to whether such acts or omissions were necessary in light of the Comalco agreements. If an act or omission is found not to be necessary, then the relevant Comalco party is subject to the breach provisions in the EGRs.
- We pause here to note that the "must comply unless can't" philosophy is itself a departure from the ringfence originally proposed by the parties. Comalco does not take issue with that. But it does object to any intervention which does, or has the potential to, override its significant existing property rights. The ECEU's public policy appears to be consistent with that approach.
Uncertainty around breach
- It is not possible for the Comalco parties to know with absolute certainty, at the time the EGRs come into force, all of the conflicts that exist between the Comalco agreements and the EGRs. Whilst Part C and Part G are the obvious Parts that conflict with proper performance of the Comalco agreements, uncertainty remains over the other Parts.
- The comment was made to us in discussions with you that the rules really only embody rules that have been in force for a very long time, such as MARIA and MACQS. This may be true, but it must be appreciated that Comalco is new to these rules - it has not had to observe them before. As such, Comalco needs time to assimilate them and work through properly how they will affect operational issues in the supply of electricity to the Smelter.
- Smelter employees most closely involved in managing and monitoring power supply, and who are in daily (constant) contact with relevant Transpower and Meridian personnel to ensure the smooth delivery to the Smelter without adverse grid effects, will need time to become familiar and work with the rules. Comalco is simply not prepared to say it is comfortable with a new set of rules before the necessary familiarity has been gained.
- This lack of knowledge was not such a major issue when the parties were envisaging (as proposed by the EGEC process) a full ringfence. It becomes, however, a significant issue as soon as there is a proposal to pare the ringfence back to Parts C and G only.
- An impediment to the Comalco parties has been the lack of a final copy of the rules with which to perform an analysis. The ECEU has conducted a major consultation on the EGRs (September 15) and the Comalco parties do not know the outcome of this consultation. It is possible that the EGRs may as a result be changed in a manner that will affect the Comalco agreements.
- Thus CPNZ and the Comalco parties face the risk of being in breach of the EGRs on the day they come into effect.
Possibility of Transition period
- The consultations and submissions to date have been a paper exercise. The EGRs have not been "tested" in the reality of the New Zealand electricity industry. It is likely that, in operating within the rules, parties (not just the Comalco parties) will discover conflicts and difficulties. For the Comalco parties those conflicts and difficulties can be severe given the criticality of electricity to NZAS and the significant liabilities upon the Comalco parties.
- Comalco suggests that, if necessary to achieve a full ringfence, Part 10 could provide for a review of its scope after a certain period of time (say, 2 years). This time would give the Comalco parties an opportunity to "live with the rules". During such period the Comalco parties would still be subject to regulation 199 and the balance of Part 10.
- Part C and Part G would not be subject to review given their criticality in performing the Comalco agreements.
No incentive on Comalco parties to breach EGRs
- Extending the ringfence will not give the Comalco parties any incentive to engage, or not to engage, in acts or behaviour that will breach the EGRs. Regulation 199 will still apply and the Comalco parties will be obliged to comply with the EGRs in as far as their Comalco agreement obligations, rights and powers allow.
- It should be borne in mind that many of the obligations and restrictions in the Comalco agreements are directed to the maintenance of overall grid security whilst maintaining security of supply to the Smelter. The Comalco agreements carefully balance the needs of these two imperatives. The EGRs deal only with the former.
- The Comalco parties will be aware of the oversight role of the Board and will not be incentivised to act indiscriminately and without due regard to the EGRs.
Rules can change
- Comalco is also concerned with the limited scope of the ringfence from the perspective of the possibility of future change to the EGRs. Thus the Comalco parties may be exposed in the other parts of the rules that are not covered by the ringfence should a new rule cause conflict or difficulty. This does not give the Comalco parties certainty over the performance of the Comalco agreements and changes the risk apparent to the Comalco parties.
- It is true that there will be an ability to provide input on any change process, but that is of little comfort to Comalco as, in reality, it will always be difficult to change any existing mindset, particularly where Comalco's issue with a particular change proposal might be one peculiar to the Smelter which is not of immediate concern to other industry participants. Comalco will very likely be a "lone voice".
- As has already been mentioned to the ECEU in discussions, Comalco has had difficulty in understanding the interest that other generators and industry participants appear to have in forcing change to the Smelter's supply arrangements.
Test of demonstrable difficulty
- In the public policy paper a test of "demonstrable difficulty" was applied in justifying the ringfence provisions. CPNZ is unsure of the meaning of this term but has interpreted it as meaning "hard, onerous or unfair".
- CPNZ submits that, as previously discussed, it cannot make a full and proper judgment until:
26.1 it sees a final copy of the rules;
26.2 conducts a rule by rule analysis; and
26.3 has experience living with the rules. - CPNZ notes that in the public policy paper officials have noted that:
27.1 it is undesirable to prevent performance of contracts by introducing law (paragraph 12);
27.2 overriding the Comalco agreements by enacting the EGRs would send adverse signals to business investors (paragraph 13); and
27.3 a ringfence be restricted to existing rights and obligations and not restrict future decisions by government (paragraph 14). - Extending the ringfence is not contrary to meeting these objectives. In particular the government is not restricted from modifying the ringfence at some later date through its regulation making powers.
Clarification of effect on Comalco agreements
- As previously advised, Comalco requires that the effect of the EGRs on the Comalco agreements be clarified, to avoid any argument that they might somehow defeat the Comalco agreements. To this end, Comalco suggests inserting a new regulation 200 (or 199(b)) to the effect that:
Subject to regulation 199[(a)], nothing in these regulations or in the rules affects a Comalco party's rights or duties under the Comalco agreements, and no Comalco party shall be entitled to rely on anything in these regulations or the rules as grounds for non-compliance with any of the Comalco agreements or as a defence to any claim for failure to observe or perform any of the Comalco agreements in accordance with their terms.
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