Terms of Reference for a Ministerial Review of Electricity Market Performance
Objective of the review
1 The objective of the review is to improve the performance of the electricity market and its institutions and governance arrangements in order to better achieve the government’s objectives for the electricity sector.
The Government’s objectives for the electricity sector
2 The Electricity Act 1998 s172N sets out the following objectives:
i to ensure that electricity is produced and delivered to all classes of consumers in an efficient, fair, reliable, and environmentally sustainable manner; and
ii to promote and facilitate the efficient use of electricity.
3 Within these objectives, the Government is particularly concerned to ensure that the electricity sector contributes to economic growth by providing for security of supply and efficient prices.
Components of the review
Options for early implementation
4 The review should identify options for early implementation ahead of the wider review. These will build on the recent work to streamline transmission investment decisions and include reducing overlap in the delivery of energy efficiency programmes;
Wider review
5 The review should:
a Briefly assess the performance to date of the electricity market, institutions and governance arrangements in achieving:
i an appropriate balance between security of supply and the economic cost of non-supply;
ii an efficient and fair price to all sectors of the economy and classes of consumer;
b Identify problem areas – this should include, among other things:
i How market structure and regulation affects:
(a) levels of competition in the wholesale and retail markets;
(b) the management of hydro resources, (and, more generally, the management of risks affecting resilience and reliability);
ii institutional and governance arrangements, in particular:
(a) whether regulation of Transpower is efficient – including consideration of the overlap between the Electricity Commission and the Commerce Commission;
(b) whether there is sufficient industry involvement in rule-making;
(c) whether the multiple and potentially conflicting objectives of the Electricity Commission set out in the Electricity Act impact on performance (efficiency, reliability, fairness,and environmental sustainability);
(d) whether the Electricity Commission has too many roles, and roles that potentially conflict (rule-recomender, rule-enforcer, forecaster, market manager, reserve energy manager, conservation campaign manager, transmission investment, pricing and contracts approver, energy efficiency promotion).
c Assess to the degree possible the costs and benefits of different reform options; and
d In developing recommendations, assess to the degree possible the costs and benefits of key options by reference to the Government’s objectives for the electricity sector.
6 In making these assessments, the review should consider:
i The findings and recommendations of the Electricity Commission’s review of winter 2008;
ii When available, the findings and recommendations of the Commerce Commission’s investigation into competition in the wholesale and retail electricity markets;
iii Any other available analysis of competition in the wholesale and retail electricity market and possible improvements;
iv Analysis of electricity sector regulatory and governance arrangements by LECG for Business NZ;
v Relevant theoretical perspectives on market design and regulation in the electricity industry;
vi Any factors specific to the New Zealand electricity market and regulatory framework;
vii Relevant market design and regulatory developments and examples in other countries.
7 The review will take the current market design as a starting point and focus on improvements to this model. The assumption here is that there is still room for improvement within the current market approach and that there is no evidence that a move away from a market approach to a more centrally controlled approach would provide additional net benefits.
8 The following matters are not part of the review process:
i The ownership and governance of SOEs;
ii Economic regulation of electricity lines, other than to the extent that institutional arrangements impinge on the wider electricity market;
iii Wider energy sector regulation, such as gas regulation.
9 The review should comment on the detailed implementation requirements of any recommendations, for example, any required legislation or regulation changes, including any required transitional arrangements.
Resources, timeframes and process
10 The review will be led by the Minister of Energy and Resources supported by a Technical Advisory Group and a Project Team.
11 The Technical Advisory Group will comprise around six experts with a Chair. It will be supported by the Ministry of Economic Development. It will report regularly to the Minister of Energy and Resources on progress with the review.
12 The functions of the Technical Advisory Group are to provide input, advice and options for reform into the process. The Technical Advisory Group will not be required to produce a separately released public report, but will contribute to the analysis and advice prepared by the project team.
13 Independent members, including a Chair, will be appointed to the Advisory Group by the Minister of Energy and Resources on the basis of extensive industry experience, relevant economic and technical expertise and an understanding of regulatory issues.
14 Conflicts of interest will be actively managed. Relevant interests will be disclosed throughout the process and it will be part of the Chair’s role to ensure this happens and to respond appropriately.
15 The Project Team will comprise a small group of officials from Ministry of Economic Development and the Treasury, with DPMC taking a close interest. The State Services Commission will also be consulted if any issues relate to its jurisdiction. External technical advisers will be contracted as necessary. The Project Team will work closely with the Advisory Group to ensure that ideas and options are fully canvassed and reviewed.
16 The review will comprise several phases. An indicative timetable is as follows:
Project Phases
/Estimated Dates
/Appointment of Advisory Group and Project Team
/March 2009
Evaluation of options, liaison with Minister(s)
/April – May 2009
Cabinet approves early implementation options
/June 2009 and then separate fast track process (including Legislation if required)
Cabinet approval to release discussion paper
/June 2009
Public consultation on discussion paper
/July 2009
Analysis of submissions, development of final recommendations
/August-September 2009
Cabinet agreement
/October 2009
Preparation of legislation
/November 2009 - January 2010
Legislation introduced
/February 2010
Select Committee
/March 2010 - May 2010
Introduction of changes
/June 2010
17 Note that implementation of any Cabinet decisions that do not require amendment of primary legislation can commence at any time after decisions are taken. For example, some decisions may result in the Electricity Commission undertaking the detailed implementation design work and then recommending rules or regulations under existing provisions of the Electricity Act.