New Zealand Yearbook of New Zealand Jurisprudence
Last Updated: 12 April 2015
The Case of Electricity
Energy is a fundamental input for economic activity and for human existence generally. Lack of or disruption of supply is a major component of poverty for individuals and a major constraint on commercial activity. On the other hand, supply of energy causes many of our most fundamental environmental problems. The retail supply of energy to businesses and to individuals in the form of electricity raises questions of consumer law and also of the public good. While a number of consumer law issues about consumer choice, price and quality can be left to market forces, it is generally accepted that many consumer issues cannot be satisfactorily resolved by the market, and require legislative intervention, regulation, or a government presence of some kind. I do not intend to engage in the familiar kind of debate about the adequacy of market forces to govern all consumer issues, but assume that regulation of some kind is necessary, and ask, in the context of the electricity industry, whether it ought to be industry-specific regulation or to be general regulation only.'
Barry Barton is Professor of Law at the University of Waikato. He specializes in natural resources, environmental and energy law, and is member of the Academic Advisory Group of the Section on Energy and Natural Resources Law of the International Bar Association.
2 Generally on New
Zealand electricity law, see Barton, BJ 'Developments in Electricity Law and
Policy in Europe' (1998) 2 NZJEL 187; Barton, B J 'More Restructuring: The
Government's New Proposals for Electricity Reform' (1998) 2:12 BRMB 134; Barton,
B J `From Public Service to Market Commodity: Electricity and Gas Law in New
Zealand' (1998) 16 JERL 351; Barton, B J 'Governance
in the Electricity
Industry'  NZLJ 300; Barton, B J 'Responsive Regulation in the Electricity
Industry'  NZLJ 347; Barton, B J New Zealand, part of Energy Law in
International Encyclopaedia of Laws, (The Hague: Kluwer Law International,
Convery, R 'Electricity Industry Reform Act 1998' (1998) 8 AULR 946;
Kalderimis, D 'Pure Ideology: the "Ownership Split" of Power Companies in the
1998 Electricity Reforms' (2000) 31 VUWLR 255.
GENERAL CONSUMER REGULATION
By general consumer regulation we understand the common law and general law of contract and sale; general statutes such as the Fair Trading Act 1986 and the Consumer Guarantees Act 1993; and the competition rules embodied in the Commerce Act 1986. These are laws that affect most kinds of economic activity. They are couched in general terms rather than in detailed rules for each kind of transaction, and they emphasize the role of the courts rather than the role of administrative agencies, although the Commerce Commission is something of an exception. Even though the Commerce Act may not spring to mind as consumer legislation, it has an important role. It is effective in many ways in ensuring that competition is not reduced through mergers or through collusion. It is less effective in responding to monopoly; it does not target the existence of monopolies, and indeed monopolies are more likely in New Zealand because of the small size of our markets, the paucity of participants, and the difficulty of obtaining economies of scale. The Act can be used to prevent a company with a dominant position in a market from using that position to restrict the entry of another company into the market, using it to prevent another company from engaging in competitive conduct, or using it to eliminate another company from the market; but Telecom Corp NZ Ltd v Clear Communications Ltd  1 NZLR 385 (PC) showed that there were serious limits on its ability to prevent use of market dominance for anticompetitive purposes. Amendments to the Act to address these limits have been much discussed.'
In contrast to such general laws, industry-specific regulation applies to a particular industry, and generally results in a higher degree of regulation. Industry-specific regulation usually entails the control of privately owned industries by an agency that has power to license entry into the sector, to prescribe the services to be provided, and to set rates of return and of tariffs, all in the public interest. In the United States and Canada, electricity and gas companies have long been so regulated by public utilities boards. Although in New Zealand we saw that pattern for industries such as road transport, the electricity
3 Patterson, R `Light-Handed Regulation in New Zealand Ten Years On' (1998) 6 Competition & Consumer Law Journal 134.
industry was in public ownership and governed by legislation like the Electricity Act 1968, which controlled the industry under its own set of rules. The neoliberal economic approach to governance and to the role of the state that prevailed from 1984 criticised industry-specific regulation for stifling market forces, for trying to pick winners, and for overall vagueness in objectives. In many areas, industry-specific regulation and its associated agencies were swept aside. Government ownership was similarly cut down. Consumers were to be protected by the free play of market forces, which would improve the quality of goods and services and drive prices down. These market forces would be supplemented and governed by general consumer law.
CONCERNS OF ELECTRICITY CONSUMERS
Electricity is rather different from other consumer purchases, so it is worth considering for a moment the matters that will be of concern to purchasers. Price is obviously important. Other commercial aspects are satisfactory tariffs for small users, incentives or disincentives to conserve electricity (a large fixed price element in the tariff acts as a disincentive for conservation), meter inspection and accuracy, billing arrangements, disputes procedures, disconnection for non-payment, and the ease of communication with the company. Quality of supply is important; blackouts, brownouts and voltage spikes can wreak havoc in a home or a business. Security of supply can be a matter of short-term disruption caused by storms and the like, and raises questions first about the robustness of the construction of the supply network to prevent damage and second about the speed of repair if damage does occur. Security of supply also has a long-term aspect, in regard to the adequacy of generation to meet demand, and in regard to the adequacy of transmission lines to bring the power to where it is needed. These issues raise questions about the adequacy of investment in generation and in infrastructure and about the adequacy of demand management.
These concerns may involve one or more of the four main components of the electricity industry; generation, transmission, distribution, and retailing. The ordinary pattern now is for a customer to buy electricity from a retailer that is also involved in generation, such as Contact Energy, Genesis Power, Meridian Energy, Mighty River Power, or Trust Power. That retailer-generator makes arrangements with Transpower for the transmission of power across the national grid from its power stations to city or regional
substations. The retailer-generator makes further arrangements with the distribution companies, such as WEL Networks or Orion, that own the local distribution networks that bring the power from the substation to individual homes, farms and businesses. Distribution companies are also called lines companies. Small consumers are ordinarily in contractual relations with the retail company and not the local distribution company.
Electricity consumers have had a lot to complain about in recent years. For much of the time, they have had no choice in which retailer brought them their electricity, and there has seemed to be no restraint on the prices and the terms on which electricity would be made available. Companies enjoyed a monopoly position, and dragged their feet in moving into a competitive regime, obstructing customers and competitors who wished to alter the status quo. Many of the local energy trusts were dogged with secrecy and ineptitude as they struggled with their role as shareholders in energy companies. There was a power shortage in 1992 as lake levels dropped over winter. Power company contracts with domestic consumers left a good deal to be desired.' In 1998 Mercury Energy's supply of electricity to Auckland's central business district failed for a period of weeks. Its customer contracts capped its liability for failure to restore power within three hours to $50 for residential and $100 for businesses, and so reduced the company's incentive to maintain the security of supply.' There was widespread chaos in 1999 as companies swapped customer lists to comply with the legislative direction to separate distribution and retail functions. Some customers were double-billed, and others were forgotten for months as companies struggled with unfamiliar new territories and incompatible computer systems. This scenario arose from a backdrop of rapid commercialisation and deregulation of a tradition of governmental generation and supply of power to citizens as a public good.
DEVELOPMENT OF THE INDUSTRY'S LEGAL FORM
For the mid-decades of the twentieth century, generation and transmission were in the hands of the NZ Electricity Department or
4 Ministry of Consumer Affairs, An Analysis of Contracts, Metering and Disputes Procedures for Domestic Electricity Customers January,1997.
Electricity Division, while distribution and retailing were in the hands of local electricity boards or municipal electricity departments. In 1987 the NZED was corporatized under the State-owned Enterprises Act 1986, with a principal objective of being a successful business. It lost its legal monopoly over generation and transmission. Local distribution was reformed by the Energy Companies Act 1992, which required local communities to corporatize their electricity boards or departments. The Act's emphasis was on corporate form and allowed shares in the new companies to be distributed as the representatives of the local communities saw fit. The distributions varied widely from place to place, but many local energy trusts were established to hold shares. Also in 1992 a new Electricity Act removed franchises, licensing, price control and obligations to supply. In 1994, Electricorp, or ECNZ, was restructured by putting the national grid in the hands of Transpower, and then restructured again in 1995 by splitting off about 25 per cent of the generation capacity in Contact Energy; both of which remained as state-owned enterprises. The phase of public development was therefore followed by a phase of restructuring.
It was hoped that a 'market' and competition would be the result of the restructuring; that new companies would build generation and distribution, and that retailers would compete for customers. Market competition would then determine the true value of electricity delivered at different places at different times, and price signals would indicate whether companies should make capital investments in new generation and distribution assets. If consumers could switch to another supplier offering better terms, then suppliers would be obliged to offer competitive prices, security of supply and terms of service. The industry set up the New Zealand Electricity Market in 1996 with a spot market to facilitate wholesale trading beyond the individual trades that could be negotiated under MARIA, the Metering and Reconciliation Information Agreement. The only formal regulation in place (apart from the Commerce Act) was the obligation of distribution companies and Transpower to disclose certain information about their monopoly operations under the Electricity (Information Disclosure) Regulations 1994, revised in 1999. It was therefore a restructuring with the resulting industry activity to be governed by light-handed general regulation and not by focused industry-specific regulation.
The hoped-for competition did not emerge in any significant way in spite of these structural reforms and in spite of the removal of barriers
to market entry and to the discipline of market forces, so further change became inevitable. The industry was cajoled into making better arrangements for retail competition so that homeowners and small businesses would have the benefit of different retailers competing for their accounts. Competition was also promoted by further structural reform. In generation, ECNZ's market dominance was dealt with by dividing it, in 1999, into Mighty River Power, Genesis Power and Meridian Energy, all continuing to be state-owned enterprises. Contact Energy was privatized at the same time. The distribution and retail sectors were restructured under the Electricity Industry Reform Act 1998; the local energy companies were compelled to separate their distribution and retail functions, and sell one or the other. The rationale was that this would prevent them from cross-subsidizing their competitive retail operations (i.e., especially large customers) from their distribution or lines businesses where customers had no choice but to use their networks. Most of the local energy trusts retained their lines businesses and sold their retailing businesses to one or another of the generator companies.
In 2000 there was a Ministerial Inquiry into the Electricity Industry The government adopted most of the Ministerial Inquiry's recommendations and embodied many of them in the Electricity Industry Bill presented to Parliament later in 2000. The Bill proposed that price control be reintroduced, but on distribution companies only. It proposed that such controls be targeted at particular companies, and limited as to term. The Commerce Commission was to determine the criteria, the thresholds and the procedures under which controls might be imposed on individual distribution companies. First the Commission would examine the asset valuation procedures being used by all distribution companies in complying with the information disclosure regulations, because asset valuation is the key to determining the size of a company and therefore its profitability. The prevalent optimized deprival valuation (ODV) method would be re-examined. This re-introduction of price control would not be an easy exercise; there is no recent precedent in New Zealand for price control of any good or service, and even the lightest form of price control draws the regulator into a difficult involvement with the industry.
6 Ministry of Economic Development Inquiry into the Electricity Industry:
Report to the Minister of Energy Wellington, 2000.
The Ministerial Inquiry also proposed an amendment to the Consumer Guarantees Act 1993 to provide that electricity be covered by the Act as a good, and that lines services be covered as a service. This would reverse the state of law determined by Electricity Supply Association of NZ Ltd v Commerce Commission (1998) 6 NZBLC 102,555 (HC). In consequence, retailers would be required to supply electricity that is of acceptable quality, and lines companies would be obliged to provide their services using reasonable care and skill in the sense of the Act. Reasonably foreseeable consequential losses, such as damage to sensitive equipment, would have to be made good. Retailers would have to negotiate the consequent liability that they expect the lines companies to carry.
Industry members were implementing other recommendations from the Ministerial Inquiry of 2000, in the knowledge that the government was obtaining statutory powers to impose the required changes if they did not move promptly. Key changes concerned the industry's organs of self-regulation, the NZEM, MARIA and the MACQS. (The latter deals with use of the national grid.) The three organs were being combined into one single Electricity Governance Board, membership of which would be compulsory for generators, retailers, traders, and also for Transpower and for distribution companies. The EGB would be less dominated by the generator-retailers, and would include consumer representation. It would have wider responsibilities in the industry.
The Inquiry also recommended that the industry establish an `ombudsman' or
complaints commissioner scheme to resolve consumer complaints,
example of Victoria and New South Wales, and (in New Zealand) the Banking
Ombudsman and the Insurance and Savings Ombudsman.
The availability of a
complaints commissioner or some such officer would provide a useful and cheap
way for consumers to resolve
disputes with their power companies. (Use of the
term 'ombudsman' requires consent of the parliamentary Ombudsman.) One question
about the scheme was whether the commissioner would have any say over the
content of the contract between the company and its customer.
input, the commissioner's power to ensure fair outcomes would be limited, even
if he or she had the power to depart
from the express terms of the contract.
Unreasonable terms could lead to bad results even though the commissioner's
process was a
fair one. The EGB proposed to work on model contracts. If it did,
its proposals would be best discussed with the complaints commissioner.
functions would affect the work of the commissioner, for instance decisions on standards for security of supply, rules about customer switching and pricing methodologies.
It took policymakers a long time to perceive that general consumer legislation in tandem with structural reform would not be effective. The Ministerial Inquiry of 2000 can be regarded as a departure from the previous reliance on restructuring as a policy instrument, and a return to formal industry-specific regulation. It is nonetheless still light regulation in several respects. It does not require any licence or franchise to enter electricity retailing or indeed to enter any other part of the industry. While this reduces barriers to entry and reduces the regulatory burden, there is no opportunity in licence renewals to require standard contracts, to review performance measures, or to implement any other measures to protect consumers. Nor has any Electricity Commission or such separate agency been established.' (The Ministerial Inquiry into the telecommunications industry that paralleled the inquiry into the electricity industry recommended a separate Telecommunications Commissioner with an independent office, but that was watered down to a Commissioner housed in the Commerce Commission.) Formal industry-specific regulation will therefore play a moderate but growing role.
Other aspects of the legal regime have played an important part for some time, and will continue to do so. The use of general consumer law will be enhanced with the application of the Consumer Guarantees Act. In addition, the numerous restructurings and use of governmental powers over state-owned enterprises have in fact acted as a less formal kind of industry-specific regulation. Further, industry self-regulation, to avoid government reregulation, plays an important role. The self-regulation is very detailed and at times quite legalistic. Some of it directly affects consumers, such as in the scheme for a complaints commissioner and in plans for a model contract, while aspects such as the operation of the Electricity Market affect consumers only indirectly. Under the legislation that was proposed the government would again have more explicit legal tools with which to ensure that the market institutions met government policy objectives.
7 But see the Postscript, over page.
Many of these elements of the legal regime, including general and industry-specific regulation, have been directed at encouraging market competition. Competition has been slow to emerge, but it has begun to show benefits to consumers. Retailers face competitive pressure in most parts of the country, even in the low-return domestic sector. Customers can move to another supplier if they are not satisfied, and indeed they have done so in large numbers. Consumer contracts have improved. Retailer-generators who invest recklessly in new generation facilities can no longer compel their customers to pay for them. However the amount of effort required to encourage market competition, and to keep it going, is striking. It has required more than a simple removal of the legal barriers to competition, and more than the restructuring of monopolies as competitive commercial entities. It has required more than general consumer and competition regulation. Paradoxically, bringing market competition into existence has needed a great deal of regulation. Keeping it going has not been easy either; the configuration of the industry as dominated by four or five large retailer-generators may marginalize the wholesale market and reduce effective competition, to the detriment of consumers.
The Electricity Industry Bill was passed in the form of the Electricity Amendment Act 2001, Electricity Industry Reform Amendment Act 2001, Commerce Amendment Act (No 2) 2001, and the Ministry of Energy (Abolition) Amendment Act 2001. The Commerce Amendment Act 2001 strengthened the Commerce Act ability to guard against misuse of monopoly power. The Commerce Commission has work under way on distribution price controls, to establish performance thresholds against which companies will be assessed as a screening mechanism. It is also working on information disclosure requirements. An Electricity Complaints Commissioner has been appointed. She can investigate complaints and issue decisions binding on the company, involving amounts up to $10,000. An Electricity Consumer Code of Practice is part of the scheme. Nearly all power companies participate in the scheme. The proposed amendment to the Consumer Guarantees Act 1993 was made in 2003.
A shortage of water in hydro lakes over the winter of 2001 raised serious concerns about security of supply, concerns that will arise inevitably in a hydro-dominated generation system with only moderate amounts of storage. High wholesale prices forced NGC out
of retailing because it had no generation assets and no hedge contracts in place; its proposal to raise prices to its customers was not viable. A second dry winter in 2003 caused wholesale prices to rise fivefold. At the same time, industry efforts to agree on the rules for the single Electricity Governance Board were not successful. On 20 May 2003 the government announced that its solution to both problems was to form a new Electricity Commission, which will take over the three industry self-regulatory agreements, and will take steps to ensure that sufficient reserve power capacity is available to meet dry year needs. The Electricity and Gas Industries Bill was then introduced to implement this decision. It also proposes that industry consumer dispute resolution systems be regulated. If the Ministerial Inquiry of 2000 represented a departure from restructuring and light-handed regulation, and a return to industry-specific regulation, then the movement towards re regulation has accelerated greatly, as problems in reliability of supply and generation reframe electricity away from a simple market commodity and back towards an essential public good.