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Barton, Barry --- "Law, Government, and State: Trends in energy law" [2004] NZYbkNZJur 2; (2004) 7 Yearbook of New Zealand Jurisprudence 1

Last Updated: 12 April 2015

Law, Government, and State:
Trends in Energy Law

Barry Barton^*

In this article, I shall provide some background for the present situation in electricity reform. Electricity looms larger as a policy matter than gas, but it too faces changes in its legal framework. I then pose some broader questions about regulation; about the kinds of regulation that one encounters, other ways that government is involved in economic activity, and then different dimensions or considerations that need to be taken into account in determining how regulation should be designed.

I. THE BACKGROUND

First let us consider the situation in 1986 — not all that long ago. The sector was governed by the Electricity Act 1968. It required one to hold a licence to be in the business of supplying electricity, and it prescribed a formula under which electricity supply authorities were charged for electricity supplied by the Electricity Department or Electricity Division. The NZED had a monopoly. After the reforms of the late 1980s and early 1990s, say in 1996, the electricity sector was characterized by: a competitive market, no licensing and therefore no barriers to entry, no regulatory agency, no price control for lines or wholesale or retail sales, Electricity Corporation of New Zealand and Contact Energy Ltd as state-owned enterprises, the New Zealand Electricity Market, and, in spite of the reforms, a lack of real competition. Since 1996 there has been much effort to cajole real competition into existence, and to make the benefits of competition more widely available to consumers. This effort was undertaken firstly by the Electricity Industry Reform Act 1998, splitting ECNZ into Genesis Power, Mighty River Power and Meridian Energy; and splitting lines (that is, distribution) from retail and generation. New rules made it possible for retail customers to switch suppliers. Contact Energy was sold to private shareholders. The second phase could be described as 'steered self-regulation': 'industry solutions where possible and regulation where necessary." The Ministerial Inquiry chaired by David Caygill, with Stephen Kelly and Susan Wakefield, resulted in a large dose of reform for institutions of self-government, in the establish

Professor, School of Law, University of Waikato. I thank Anna Kingsbury and Nan

Seuffert for useful discussions while I wrote this article.

Ministry of Energy, Energy Policy Framework, 3 October 2000.

ment of the Electricity Governance Board, and a set of statutory changes, mainly in the Electricity Amendment Act 2001. Lines or distribution activity was subjected to price control by the Commerce Commission. Retail protection was improved. Distributed generation was facilitated, and the separation of lines and supply in the 1998 Act was eased.

How successful has the market been? Competition has appeared, in both wholesale and retail markets, although, with few players, there are doubts about the depth of the competition. Diversity has opened up in the building of new generation. Innovation has become possible. Cogeneration or combined heat and power (CHP) has become widespread. Landfill gas and wind power face no major institutional barriers. Prices have reflected scarcity, but have not been successful in leading to increased capital investment in new capacity for hydro-firming purposes. Self-regulation has proved to have significant capacity to meet national needs. It kept the wholesale market running. It was a good deal more successful in doing so than its California counterpart. It showed itself able to respond (with a nudge) to government policy requirements like retail switching and demand-side participation. It engaged in active enforcement, under the Market Surveillance Committee. The market institutions were able to make new rules quickly to respond to changing circumstances.

As for competition, policy makers have become less sure that it is a natural state of affairs that will assert itself. On monopoly, they have become willing to accept that it exists, indeed that it is inevitable, especially in a small country, and especially one with low population density and demanding terrain. It is now generally accepted that monopoly cannot be made to go away, and that we must dealt with it. This is a contrast from views a few years ago. We now regulate price, but not quality of service or other aspects.

After the Ministerial Inquiry in 2000, the industry received some specific direction from the government. In fact the government gave it some substantial challenges. Most of the problems were part of the expanded mandate contemplated for the new Electricity Governance Board; in particular, the bringing into industry self-regulation of the lines companies, and the bringing in of Transpower, with the associated transmission pricing and investment issues. For two years, the industry, along with user group representatives, worked hard at resolving all those requirements, in the form of a new rule book. But it was unable to reach the `substantial majority' the government wanted to see. Consumer groups felt that the generator-retailers' position would be entrenched, to the detriment of others; Transpower was unhappy with price and investment

implications, and Meridian and Comalco could not sign off on rules that they believed would cause breaches of the long-term contract to supply the Tiwai Point Smelter.² Before finding fault in all this, one should be careful to understand the magnitude of the issues. Disputes about transmission pricing, and indeed about the very basis of the relationship between Transpower and its users, had been going on for years, and there was no particular reason why the EGB rules process should have made them more tractable. The range of issues was very wide; not simply generation and transmission, but right through distribution and consumer protection. In some ways the process was struggling to make new law but requiring the concurrence of the parties whose operations would be affected. As for the length of the government's wish list for the industry, it is useful to remember that there are all kinds of self-regulation and relationships between a sphere of self-regulation and the general legal system. Self-regulation is often coerced to one degree or another; or variously sanctioned or supervised, and not entirely voluntary. One writer, Julia Black,3 divides self-regulation into mandated, sanctioned, coerced, and voluntary forms. Margot Priest⁴ speaks of various kinds of supervised self-regulation. So there are shades of coercion, and shades of voluntariness.

The other factor that emerged in early 2003 was a serious shortage of hydro water in storage and relatively dry conditions for hydro generation. An urgent national savings campaign was required. This came hard on the heels of a dry winter and urgent savings in 2001. The government's review of the 2002 dry winter had concluded that market mechanisms would prevent such crises from recurring, but it could scarcely say the same thing again in 2003. It looked as if the market had done absolutely nothing to improve energy security against this risk. Wholesale prices went through the roof. They went up to five times normal levels and stayed there for weeks. The prices and their volatility were a huge burden for major users like sawmills and pulp and paper mills. But the major retailers of electricity were insulated by reason of also being the major generators.

Politically, the dry winter crisis came together with the rejection of the new self-governance rules for an industry EGB, and gave the government a smooth ride in announcing on 20 May 2003 that a new Electricity

2. These were the reasons discussed in the press at the time. David Caygill's analysis in this volume is more substantial. The industry vote was announced on 16 May 2003.

³ 'Constitutionalising Self-Regulation' (1996) 59 Mod L Rev 24.

4. 'The Privatization of Regulation: Five Models of Self Regulation' (1998) 29 Ottawa L Rev 233.

Commission was to take over the running of the industry. The headline news story was that the new Commission will contract for reserve capacity to deal with dry winters, starting with a station at Whirinaki, the cost to be recovered by an industry-wide levy. But the bigger story was that the legal basis for the organization and control of the electricity industry was to change from industry self-regulation to state regulation.

II. THE GOVERNMENT'S PROPOSAL FOR AN ELECTRICITY COMMISSION

The Electricity Act 1992 was substantially amended in 2001. The amendments provided for various government powers, but under the policy of 'industry solutions where possible and regulation where necessary' the part of the Act that provided for a statutory Electricity Governance Board was not brought into force while the industry worked on its own EGB. When it became clear that an industry EGB would not appear, that part of Act was proclaimed in force, on 15 September 2003. However the law is not staying still, and in October 2003 the Government introduced the Electricity and Gas Industries Bill, in order to change the EGB's name to the Electricity Commission, to give it new responsibilities for reserve generation capacity, and to refine its powers. I will discuss the situation as if this Bill were to pass in its current form.

Under section 172N, the Electricity Commission's principal objective is to ensure that electricity is generated, conveyed, and supplied to all classes of consumers in an efficient, fair, reliable, and environmentally sustainable manner. The section also states a set of specific outcomes that the Commission is to pursue. The Commission's functions are prescribed, including establishing and operating electricity markets, and using reasonable endeavours to ensure security of supply.

In making rules and regulations, the Commission's role is only one of making recommendations to the Minister, although the process of doing so, and the Minister's powers in relation to recommendations, are elaborately stipulated: sections 172E, 172I, 172W-172Z. The Minister must have regard to the Commission's recommendations, but may to decide not to act on them, or to defer them, if he or she considers that the principal objective and specific outcomes of the Commission will be better met by doing so. Rules and regulations on can be made for a wide variety of 'electricity governance' matters; the running of the wholesale electricity market, generation, hedge price disclosure, hydro spill, transmission (including the pricing methodology), distribution pricing, hedge contracts, demand-side exchanges, retail switching, metering, prepayment

meters, consumer complaints resolution, dispute resolution within the industry, compliance, and enforcement.

The first electricity governance rules will be based on the rule book that was developed by the industry for its own EGB, with the modifications required by their change from a contractual to a statutory basis. These rules are important because, buried in their arcane detail, are major influences on the behaviour of market participants that have significant public policy content. For example, rules can be purely focused on the supply side, or, by making demand side participation more practicable, they can reward users who modify their energy use in response to market signals. The choices made in making market rules have consequences for society generally.

In relation to energy security (the issue that gave the government political momentum), the proposed power to make regulations includes the power to require generators to offer by tender a minimum volume of contracts (e.g. hedge contracts) that enable the price risks associated with the spot market to be managed; to require disclosure of buy and sell prices for hedge contracts, including futures; and to require buyers on the wholesale market to maintain minimum levels of either hedge and contract cover with electricity generators, or of demand-side management programmes and interruptible load: sections 172D(1)(2)(b) and (c), 172D(11). Companies may therefore be controlled in their choices for risk management.

The Bill proposes in section 172CA for regulations to be made for the securing and use of reserve energy. The draft Government Policy Statement^s proposes that the Commission be directed to use reasonable efforts to ensure security of supply in a 1 in 60 dry year, without assuming any demand reduction from emergency conservation campaigns, while minimizing distortions to the normal operation of the electricity market. It states the government's wish that the Commission acquire a maximum of 1200 GWh reserve energy over a four-month period, to be offered to the system operator for dispatch at 20 cents/kWh. It states that the government does not want the Commission to own the reserve generation plant. The Commission's costs in contracting reserve energy (along with its other costs) are to be met by a levy on industry participants: section 172ZC. This reflects a risk premium that the government is deciding to ask all buyers and sellers to pay. Again, companies are being controlled in their management of risk.

⁵ Government Policy Statement on Electricity Governance, 14 Sept 2003, paras 29, 30,

49.

Under the proposals of the Bill as grafted on to the existing Electricity Act, the Minister also has wide powers to issue directions to the Commission. The Minister's directions may require it to carry out other functions, to give effect to a government policy, or to achieve particular outcomes: sections 172ZA-172ZB. Directions must be formally communicated. They are to be at a general level; they must not require the Commission, in respect of a particular person, to make a particular decision or to do a particular thing, except in the case of Transpower. The Commission and its members are subject to elaborate forms of accountability to the Minister. They are stated to be individually accountable to the Minister for the performance of their duties: section 172U. The Minister sets GPS (government policy statement) objectives and outcomes for the Commission, and the Commission must agree annual performance standards with him or her: sections 172ZK-172ZM. The Auditor-General and the Parliamentary Commissioner for the Environment report to Parliament on the Commission's annual performance reports: sections 172Z0-172ZQ. The proposed GPS objectives and outcome were put out for consultation in September 2003.

Even with the Electricity Commission playing its role, we are moving into an era of tighter Ministerial regulation. The Commission is not an independent Crown entity in the sense that the Commerce Commission, the Telecommunications Commissioner under the Telecommunications Act 2001, or the Human Rights Commission is independent of the government. It performs a role that is to some extent prescribed by law, but only at a general level; its role is prescribed at the more specific level by the Minister's directions and GPS objectives and outcomes. The Government's draft GPS shows that the Minister intends to issue quite particular instructions to the Commission, such as on the details of how the reserve energy scheme is to work (including the size of the reserve and the price at which it is to be bid in), transmission investment, and minimum terms and conditions for domestic consumer contracts. The Commission is accountable to the Minister (as well as Parliament) for its performance in pursuing those directions and objectives. If there are choices to be made between different strategies with which to pursue the legally-defined objective and outcomes, then the Commission must persuade the Minister and his or her advisers of the right course of action. The Commission has no autonomy in the making of regulations and rules; it enjoys that only in their administration and enforcement. The Commission will undoubtedly have conferred on it significant responsibilities by regulations and rules; however the power vested in the Cabinet and

Minister to make such delegated legislation does not include a power further to delegate rulemaking to the Comrnission.⁶

In moving into tight ministerial regulation, we should note that we are not moving from a state of zero regulation. Regulation has in fact been widespread since 1996 through self-regulation, Statements of Corporate Intent to state-owned enterprises, Government Policy Statements, and the like. Anyone who has read the rulebooks of the New Zealand Electricity Market (NZEM), the Metering and Reconciliation Information Agreement (MARIA) or the Multilateral Agreement on Common Quality Standards (MACQS) can attest that self-regulation was regulation in abundance.

III. NATURAL GAS

The legal framework of the natural gas sector is a good deal simpler than that for electricity. There are only a handful of players in the natural gas sector. There is no gas market or gas spot price; long-term bilateral trades are the norm. There is no third-party access law; light-handed regulation has relied on the general law under the Commerce Act 1986. The government has asked the gas industry to develop better systems of self-regulation that will meet its expectations for the development of the industry, notably in wholesale trading, open access to the high-pressure transmission pipelines, especially the Maui pipeline. The government expects self-regulation or self-governance to be in the hands of an entity that represents all stakeholders, including consumers, and has a majority of independent members.⁷

The Electricity and Gas Industries Bill of 2003 proposes amendments to the Gas Act 1992 that would work in the same way as the Electricity Amendment Act 2001 was intended to work. The Act will include sections to establish new statutory regulation, but those sections will not come into force immediately, giving the industry an opportunity to set up its own self-regulation in a way that satisfies the Minister and forestalls statutory regulation. If the statutory regulation comes into force, it will be administered by the Energy Commission, being the Electricity Commis

⁶ The proposed power to make regulations to impose dispute resolution procedures on

the industry the proposed s 172D(I)(28)-(30) stands out for noting as a serious intrusion on private rights under the general law and the fundamental right of access to the ordinary courts for the resolution of legal rights.

Summary of Government Decisions, 6 November 2002, http://www.med.govt.nz/ers/ gas/review/decisions/decisions-sununary.html, and Government Policy Statement: Development of New Zealand's Gas Industry (28 March 2003).

sion bearing a new name and extended powers. Whether or not this happens, the Minister will have new regulatory powers over the gas industry, as indeed the 2001 Act provided for electricity. In May 2003 the Commerce Commission began an inquiry into gas pipeline services, at the request of the Minister under Part IV of the Commerce Act, with a view to price control. It was only the second industry to undergo such an inquiry.

IV. WHAT KINDS OF REGULATION ARE THERE?

Speaking generally, one can say that we employ regulation for an activity that we as a society want to see take place, but which without intervention has potential effects that cannot be allowed. In enacting regulatory legislation in New Zealand, we find ourselves in a novel situation. It is useful to step back and ask in general terms what kinds of regulation might be available, particularly in economic matters. What taxonomy of regulation exists?⁸

A. Competition

Let us start our list with competition. If efficient and socially acceptable prices for a service like electricity can be obtained through market competition, then there is no need for legal mechanisms to set them. Competitive pressure has emerged in some parts of the electricity sector to great advantage, even though it may not be as strong or as widespread as we would like. Competition can therefore be effective in changing corporate behaviour, and so should be listed as a form of regulation. (In other fields such as environmental regulation, much effort is put into devising special forms of economic instruments such as tradable permits in order to obtain the benefits of competitive pressure.) Certainly competition should not be forgotten before we move on to list other forms of modifying economic behaviour.

What we find, of course, in particular cases is that competition does not occur, or does not lead to the results we want, so that regulatory pressure

8 Perhaps the classical statement of the argument for regulation is S Breyer, Regulation

and its Reform (Harvard Univ Press, 1982). A different basis, independent of an economic rationale, is furnished by C R Sunstein, After the Rights Regulation; Reconceiving the Regulatory State (Harvard Univ Press, 1990). Taxonomies of regulation are offered by Breyer, by R Baldwin, C Scott, C Hood (eds), 'Introduction' p 1 at 21, A Reader on Regulation (Oxford: Oxford Univ Press, 1998), and by T Daintith, 'Legal Measures and their Analysis' p 368 in Baldwin et al. Also see V Heine, 'Understanding the Trend towards Increasing Regulation in New Zealand' presented 24 March 2003 at 5th Public Law Forum, available www.chenpalmer.com.

is required. In the electricity sector it is needed partly because of the existence of monopoly, and partly because of the special position of energy in society and the economy, a position which makes it important for life, safety, amenity, and productivity, in ways not always measured by market prices.

2. Structural Reform

Reform of the institutional and corporate structure of the industry has been much used in electricity as a means of changing behaviour. It has been effective in confining monopoly behaviour as much as practicable. But in New Zealand we have taken it as far as possible for the time being, or at least as far as possible without experiencing diminishing returns. The drawback of structural reform is that it depends upon a static view of human behaviour and economic activity. It assumes that if the rules and the structure are designed, then the mechanism, like a piece of clockwork untouched on the shelf, will work without further intervention.

2. Self-Regulation

We are at the end of the road for self-regulation in electricity for the time being. But some people hope that it will work in the natural gas sector. And there is still plenty of self-regulation elsewhere, such as in the professions, the Press Council, and the Advertising Standards Authority. A form of it is also seen in environmental protection in the Fonterra Clean Streams Accord.

The virtue of self-regulation is that it can pursue social objectives effectively with minimal interference with the private sector. (It is sometimes described as a form of 'reflexive regulation' along with voluntary measures and education, in contrast to conventional regulation and economic instruments.)⁹ It can be well-tuned to the quickly-changing circumstances of the particular group or industry, and it can be expertly administered with high levels of acceptance by people who see it as their own creation, rather than an imposition on them by outsiders. On the other hand, it can conceal group self-interest, it can exclude external scrutiny, and it can evade active administration and enforcement. In a period where in electricity we are designing a new regulatory framework, we can usefully ask ourselves what can be retrieved of the benefits of self-regulation.

R Stewart, 'A New Generation of Environmental Regulation?' (2001) 29 Capital Univ L Rev 21.

D. Light-Handed Regulation

Light-handed regulation was especially characteristic of the electricity sector between 1992 and 1998.¹⁰ Its form was one of minimum intrusion in market decision-making:

(i) the general competition law contained in the Commerce Act,
(ii) information disclosure obligations as a transparency measure to facilitate recourse to that law, and
(ii) the threat of further regulation.

It had its origin in British models, and sought to avoid the difficulties created by more heavy-handed regulation. But there is little evidence that it was effective in modifying behaviour, especially in circumstances where there was little real competitive pressure. In electricity, competition law posed no real threat; the information disclosed was flawed and inconsistent; and very likely further regulation was too remote a possibility to compete in influence on corporate behaviour with the drive to improve quarterly earnings.

E. Principle-Based Regulation

Principle-based regulation is an effort to impose some real regulatory pressure but without being heavy-handed. It sets out the principles for behaviour and requires companies to disclose whether they comply. The legislation states the legal standard that must be met, or the legal test for the conduct that must be avoided. It is seen in the Commerce Act, in section 36 in particular, forbidding companies from taking advantage of market power. Such principle-based regulation is thought to have benefits of simplicity, predictability, and reliance on general legal system. There is no need for a regulatory superstructure. There is no need for elaborate enforcement provisions; an aggrieved party can commence court proceedings any time it wishes. Maybe it is suitable to behaviour that can be framed in terms of a particular standard. But perhaps it is less useful in dealing with multifaceted questions dealing with a whole variety of behaviours, and involving a variety of policy considerations. It also tends to be reactive, in determining whether past events meet or do not meet the

10 Statement to the Commerce Commission of the Economic Policy of the Government:

Development of a Competitive Wholesale Electricity Market, 12 Dec 1995, described in B J Barton, 'From Public Service to Market Commodity: Electricity and Gas Law in New Zealand' (1998) 16 3 Energy & Nat'l Resources L 351. Also see R Patterson, `Light-Handed Regulation in New Zealand Ten Years On' (1998) 6 Competition & Consumer L J 134, and L Hill, 'Litigation versus Regulation: How Successful is Light-Handed Regulation?' (1999) 8 Auckland Univ L Rev 1119.

prescribed standard. In court proceedings, it may produce superb investigations of questions that a quickly-moving industry faced some time ago.

F. Rules-Based Regulation

Rules-based regulation seeks to go beyond general principles and say in detail what a company must and must not do. The regulator makes a set of rules to change corporate behaviour. The rules may forbid specified activities, and they may require others (such as inspection, disclosure, or certification) that steer a company's conduct in the right direction. In debates such as the one presently under way in the field of securities law, rules-based regulation is contrasted with principle-based regulation. Rules-based regulation is the highly formal and legalistic style of American federal regulation, administered by powerful agencies that elaborate rule-making, enforcement and sanctioning powers. The characteristic proceeding is 'notice and comment rule-making.' The procedure is formal and transparent, but lengthy. Studies such as those of David Vogel have shown that this American style of regulation is the most rigid and rule-oriented to be found in-any industrial society." Rules-based regulation is often what is meant when critics speak of 'command-and-control' regulation, although it must be said that they use the term more for the purpose of abusing government activity generally than of identifying a particular legal category. At its extreme, a rules-based system without flexibility goes beyond what we normally consider to be regulation, and takes us into fields like criminal law or taxation where the statute prescribes what is required, or forbidden, and the only question that remains is whether the requirements of the law fit the particular facts.

The good side of rules-based regulation is its predictability. People know where they are, and what they must comply with. It therefore fits a 'rule of law' or 'government under law' view of society where citizens should know what law they have to comply with, and where bureaucratic interference is possible only within the constraints of the law. It can be criticized for degenerating into check-box compliance; if you can tick all the boxes on the form, then you are in compliance with the rules, even if the overall pattern of your behaviour is blatantly contrary to the intent of the regulatory scheme. But in truth, people just love check boxes. They love being given a list of requirements that they can work through to determine compliance. Lists make life so much easier for people, whether they work on the regulator's side or on the side of the regulated

^{I I} D Vogel, National Styles of Regulation (Ithaca, NY, Cornell Univ Press, 1986).

companies. It is far easier to determine compliance with a set of specific rules than with some vague-sounding general principle or legal standard.

One of the bad features of rules is that they are fixed, and may not deal with unforeseen developments. The speed with which rules can be changed is an important factor. A second drawback is that a focus on compliance with rules can be a poor substitute for the changes in direction or corporate behaviour that the regulatory system really seeks. In the debate about securities and corporate governance, it is often asked how far can one compel ethical behaviour through a set of rules and procedures. A third drawback that is seen in some kinds of rule-based regulation is that it can be very antagonistic and legalistic. Companies or industry associations battle it out in formal hearings that decide what the rules will be. The relationship between the companies and the regulator is conceived in terms of the rules, and takes the form of adversarial argument about compliance and non-compliance.

G. Discretionary Regulation

In the corner opposite rules-based regulation is regulation which entrusts discretionary power to the regulator to make decisions. The regulator (an agency, a Minister, etc) is given power to approve certain activities, or to refuse them, or to allow them subject to conditions. This has the great benefit of flexibility and capacity to deal with unforeseen developments. Discretionary legislation can produce a form of regulation that is flexible and informal, where the regulator can enter into direct contact with companies about their activities with few procedural complications, and can deal with different situations on their merits. The other side of that coin, however, is unpredictability. Companies do not like an uncertain regulatory environment; they prefer to work in an environment where it is they, and not a regulator, who will decide whether something will happen and when. They do not like unfathomable discretions where the regulator essentially says 'if you put in an application we will tell you if you can proceed.'

Older legislation gave broad discretionary power. It would say something like: 'No person may sell electricity without a licence. The Minister may issue a licence to a person.' It is still common to find legislation that gives regulatory powers in broad terms. The American and Canadian style of public utility board regulation gives powers to regulate energy industries in the light of 'public convenience and necessity.' While this can be criticized for opening the door to private interest cloaking itself in the public interest, the discretion it gives can allow for a wide-ranging

approach to the issues, and the development of a broadly-based response to a policy problem. Nowadays regulatory statutes give us a lot more guidance about the objectives and interests that are to be pursued in the course of regulatory activity, acquiring some of the characteristics of principle-based regulation. They often state explicitly what matters the regulator should and should not take into account. (Under the Resource Management Act, the list of matters to be taken into account can be a page long.) Such modem discretionary statutes also state what kind of procedure and who is to be consulted before the discretion is exercised. They can therefore suffer from disadvantages of excessive complexity.

A satisfactory balance between predictability and flexibility in responding to the unforeseen usually requires a regulatory system to include both rule-making and discretionary elements.

V. OTHER RELATIONSHIPS BETWEEN THE STATE AND ECONOMIC
ACTIVITY

Let us consider some of the other approaches to the relationship between the state and sectors of economic activity. This is not a comprehensive list; for example, it does not include consensual constraints like greenhouse gas agreements, or the setting of priorities for funded research.

A. Ownership and Spending Power

We have a history of corporatizing state-owned enterprises and determining their relationship with the Crown under the State-owned Enterprises Act 1986. In the energy sector, the Act has been effective in encouraging competitive behaviour and maintaining distance from the Crown — even though three SOEs are competing in the one business. The procedure for SOEs to make statements of corporate intent has been useful, for example in Transpower's case. However the long-term future of the SOE model is less clear. We now have numbers of Crown-owned companies that are not SOEs but Crown-owned companies or CROCs, like Air New Zealand; and we have SOEs like Transpower that some argue should have their profit motive reduced by being converted to a different kind of Crown entity. In railways, the new Trackco company may not fit the ordinary SOE model. The model has not proved easy to operate in the cases of Timberlands and TVNZ.

In the energy sector the Crown has bought a new electric power station, at Whirinaki, in order to provide hydro-firming capacity. (At the same time it is selling its stake in the Kupe field.) In contrast to various kinds of

regulatory control, public ownership is certainly a very effective way to get what the state wants, and in a hurry, but the basis on which it proceeds with continuing trading activities is less straightforward. If there is to be new legislation about Crown entities, it will be interesting to see what alternative to the SOE model are offered for Crown economic activity.

2. National Champion

The formation of Fonterra has seen the legislature decide, in the Dairy Industry Restructuring Act 2001, that small is not beautiful, and that the national interest requires the formation of a large monolithic economic entity to compete on world markets. This is not an uncommon policy globally. In the energy sector Electricite de France springs immediately to mind, but France is not the only country where there exists a firm expectation that such an entity is protected by the state for the benefit of the national society as a whole. Should Air New Zealand have pursued this route? Might it yet do so?

2. Tax Policy

New Zealand gives far fewer tax breaks for policy purposes than most countries. It is interesting however to see the use of renewable fuels being boosted by the grant in September 2003 of a two-year break from excise duty for ethanol for blending into gasoline.

VI. IMPORTANT DIMENSIONS OF REGULATION

Let us move to consider what characteristics should we look for in regulation.

A. Who — What Type of Agency

Firstly, the character of the regulatory agencies that we establish will affect the kind of regulation we get. We have seen that policymakers have been reluctant to set up new agencies. Thus, even where the Telecommunications Commissioner is appointed as a new regulator, he functions as part of the Commerce Commission. We have considered some the questions one might ask about the Electricity Commission. In a small country we must be mindful of the cost and expense of setting up elaborate infrastructure. Electricity self-regulation was notable for boasting three different systems, each with numerous committees and service providers. Larger unified agencies may be better than numbers of small ones each dealing with a particular sector. In New Zealand environmental

law, research is showing that small district councils produce poorer district plans. Institutional capacity affects the quality of outcomes. poorer
district

How — What Procedure

We have already touched on this. If procedures are too sketchy, parties do not feel sure that they will be treated fairly, and time can be wasted in devising ad-hoc procedures. If procedures are prescribed in too much elaborate detail, they get in the way of good results.

100. Legalism

That takes us to the question of legalism, or juridification. How much should a sphere of regulation become dominated by law, the legal mode of thinking, and practitioners of law? In Nordpool in Oslo, I heard a company spokesperson pass on his father's wisdom in the phrase 'The more lawyers, the more lawyers.' In America, the proceedings of many of the larger regulatory agencies have become highly legalized, and lawyers are essential in the long elaborate hearings that ensue. Law and lawyers have a tendency to colonize other spheres of activity, often with poor results. ³

There is a good side. Law and lawyers are often indispensable in maintaining complex processes, ensuring that powers are exercised fairly, rationally, and in accordance with the intentions of the legislature in granting them. The rule of law is part of democracy. We must be willing to defend legal values such as openness, fairness, and clarity. In research and policy formulation, legal analysis must be employed just as much as economic and social analysis.

100. Relational Distance

Relational distance in regulation is the scope, frequency and duration of interactions between regulators and regulated, the length of their relationship and their social network. Research shows that the greater the relational distance, the greater the formality and use of formal enforce

¹² N Ericksen, P Berke, J Crawford and J Dixon, Plan Making for Sustainability: The

New Zealand Experience (Hamilton: Intn'l Global Change Institute, Univ of Waikato, 2003. An international edition by Ashgate is forthcoming.)

G Teubner, `Juridification: Concepts, Aspects, Limits, Solutions' p 389 in Baldwin et al, supra note 8; and Heine, supra note 8.

ment procedures.^I4 Contact becomes hostile and adversarial. Lawyers' letters are not always the best way to establish a working relationship. A lesser relational distance between regulator and company leads to the recognition of common interests, and a greater understanding of each other's values and underlying motivations. In much economic regulation, the most important parties are bound together in relations of exchange and interdependence.^I5 Countries differ considerably in the relational distance that is found in regulation. It is better to organize regulation so as to reduce relational distance. (Although not to the point where the gamekeepers are in league with the poachers.) For example, regulatory practices that use conferencing and technical working groups are better than ones that rely only on quasi-judicial hearings. Regulatory systems like licensing result in continuing relationships rather than occasional ones. Self-regulation has considerable strengths here.

E. Alignment to the Particular Industry

There is a strong case that regulation will be more successful if it is attuned to the structure, needs and motivation of a particular industry.¹⁶ Research shows that that the strongest control of choice of regulatory implement is from the policy field and the nature of the industry, not the legal system." In reforming the New Zealand energy sector, one should look to the regulatory approach of other countries in their energy sectors, rather than to the New Zealand approach in other sectors. Such alignment or attunement is another of the strengths of self-regulation; but state regulation can pursue it just as well.

¹⁴ The concept was originally brought into legal thinking by D Black, The Behavior of Law (New York, Academic Press, 1976). For other research and commentary, see P Grabosky & J Braithwaite, Of Manners Gentle: Enforcement Strategies of Australian Business Regulatory Agencies (Melbourne: Oxford Univ Press, 1986); C flood & C Scott, Regulating Government in a 'Managerial' Age: Towards a Cross-National Perspective (London: London School of Economics, 2000) Australian Law Reform Commission, Securing Compliance: Civil and Administrative Penalties in Australian Federal Regulation (April 2002, Discussion Paper 65, chaps. 4 & 10. Others emphasize the insights of culture or discourse: E Meidinger, 'Regulatory Culture: A Theoretical Outline' (1987) 9 Law & Policy 355, J Black, 'Regulatory Conversations' (2002) 29 J Law & Society 163.

¹⁵ L Hancher and M Moran, 'Organizing Regulatory Space' p 148, and 'Introduction' p 21, in Baldwin et al, supra note 8.

¹⁶ I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate, Oxford: Oxford Univ Press, 1992.
¹⁷ T Daintith, 'Legal Measures and their Analysis' p 368 in Baldwin et al, supra note 8.

6. Rulemaking versus Individual Decisions

We have already touched on this. In the shape of a regulatory system, we inevitably need both, in order to provide as much predictability as possible, while providing flexibility for individual cases and responding to the unforeseeable.

6. Enforcement

Regulation needs to be enforced. Without enforcement — as soon as parties recognize that there is no real adverse consequence in noncompliance — the credibility of the process is weakened. (This is another major element in the current debate about securities law.) Enforcement requires surveillance to increase the likelihood of detection of noncompliance, and the resources to make the necessary response to it. Sanctions must be substantial enough to influence behaviour. But there needs to be a range of sanctions from prosecution and ejectment from the industry through to less extreme options, so that the regulator can send the signals that are right for the situation. Prosecution is often an unsuitable reaction to a problem.

6. Principles

Regulation should be principled in the sense that its purposes are made clear, in order to restrict the regulator's discretion and to clarify the general intent of the legislature. Regulatory action should meet tests of necessity or suitability in achieving those purposes, evaluation of reasons for and against the action, and efficiency and effectiveness of the action in comparison with alternative policy instruments such as competitive pressure. (Section 32 of the Resource Management Act 1991 requires regulators to ask such questions before they act.) On the other hand, regulation runs into problems if the objectives and principles that the regulator must juggle are too elaborate.

6. Overtness

I include this with respect to self-regulation. Before the Electricity Amendment Act 2001, the relationship between the government and the 1101f-regulatory market mechanisms of the industry were not overt, and the way that the government could set or influence the objectives or guiding principles of the market were obscure. This was unfortunate, because even when it is self-regulation, regulation needs to be express, public and Constitutional_ Under the new regulatory regime, this is not a problem.

10. Accountability

We have already touched on the accountability of the Electricity Commission to the Minister. At this stage, it looks as if the Minister is responsible and accountable for electricity regulation, acting through the Commission. There may be room for debate about how accountability is shared between the Minister and the Commission, but there is no room for debate that now the individual companies and the industry collectively have no accountability except for obedience to specific rules and regulations. There are excellent new accountability measures under sections 172Z0 and 172ZP, through the Auditor General (for performance of the Commission against government policy objectives and outcomes) and the Parliamentary Commissioner for the Environment (for its performance against environmental objectives and outcomes).

10. Dynamic Character

Regulation is a continuing relationship between the regulator, the regulated companies, and the interests for whom the regulation is in place. It is an unending interactive game. It must therefore be dynamic, and the legislation must recognize this. Circumstances change, and rules need to evolve in response, sometimes quickly.

A good example of a failure of regulation to be dynamic is the Electricity (Information Disclosure) Regulations 1994. As part of light-handed regulation they required local distribution companies (and others to some extent) to make disclosure of their pricing methodologies, allocation of costs and revenues, and other matters, in order to make it clearer whether they were abusing their monopoly position. But there was no policing of the information, and some adventurous accountancy resulted. Even when working in good faith, companies interpreted the requirements in very different ways, so that the compiled information was not actually much use. The problem was soon identified, but because the rules were 'burnt in' by being made in regulations, with no regulatory agency actively administering them, the problem stayed unrectified until 1999. Now the Commerce Commission has power to make, administer, and enforce the information disclosure requirements."

So, I argue, regulation must be nimble. A self-regulatory endeavour such as the NZEM could pride itself on the swiftness of its procedure for

¹⁸ Commerce Act 1986 ss 57T-57W.

changing its rules. Private enterprises talk about their continuous corporate reinvention. Government regulation needs to be just as able to accommodate complexity and change. Talk about regulatory uncertainty and old clichés about not moving the goalposts should not prevent regulation from being dynamic.

Regulation must be continuous. An agency charged with regulatory involvement with an economic sector like the economic sector cannot be engaged only occasionally or when specific events occur. In this it must be different from the Commerce Commission, which, according to the Court of Appeal is not to be an `ongoing and omniscient watchdog'.¹⁹

L. Complexity

We should not expect the state's involvement in economic activity to be simple. It is complicated and will only get more so. Things keep changing. For example, in energy, the government has announced measures that it thinks will deal with dry year risk. But that is not the only threat to New Zealand's energy security, and one hopes that the new Electricity Commission with have the jurisdiction to address other threats and other complexities.

VII. FINAL POINTS

These observations may provide some sense of the options and issues as we re-enter the boundary lands between state and economy. It is inevitable that our arrangements will be mixtures of regulation and market activity. There is nothing uncommon about that state of affairs. It may well lead to difficulty and new complication, in fact it is sure to, and my hope is that when it does we will not dither too long but deal with it. All policy is responding the effects of previous policy, and, although we want some steadiness and continuity in our legal system, we must be prepared to adjust our regulatory arrangements. Although there is a lot of research and theory to guide our thinking, there are few ways to predict absolutely what we will find works effectively.

" Telecom NZ Ltd v Commerce Commission [1994] NZCA 212; (1994) 5 NZBLC 103,431 (CA).