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Palairet, Roger --- "Electricity governance rules and regulations" [2004] NZYbkNZJur 4; (2004) 7 Yearbook of New Zealand Jurisprudence 34

Last Updated: 12 April 2015

Electricity Governance Rules and Regulations

Roger Palairet*


The Electricity Commission was established on 15 September 2003. It is the Crown entity that is now responsible for the governance of New Zealand's electricity industry, following the failure of the industry self-regulation model. The self-regulatory model for the wholesale electricity market that evolved in the 1990s was based on multilateral contracts. This was ostensibly a voluntary system where market participants elected to become 'members' of the market trading arrangement. The terms of membership were set by contract among the participants. The first multilateral contract was MARIA in 1994,1 followed by the more extensive NZEM in 1996.2 These agreements set up a system through which industry participants related to each other. A third agreement called MACQS was negotiated in 1999, but it has never been fully operational-ised.3

One of the first actions of the Labour-Alliance Coalition Government was to establish the Caygill Inquiry into the electricity industry, which commenced in February 2000. The essential task of the Caygill Inquiry was to report on the regulatory regime under which the electricity industry was operating. The Caygill Report recommended that MARIA, NZEM and MACQS should be integrated under one industry-based `electricity governance board', and that the industry should agree to additional rules dealing with transmission pricing and investment. The electricity industry established the Electricity Governance Establishment Committee (`EGEC'), and it embarked on a two and a half year project to implement the Caygill Report recommendations.

Parliament passed the Electricity Amendment Act 2001 (` the Amendment Act') when the EGEC process was under way. The policy underpinning the Amendment Act was that the government would regulate to establish a Crown electricity governance board and to impose electricity govern

Principal, Palairet Law, Wellington, and formerly Chief Legal Adviser of the Ministry of Economic Development. I would like to acknowledge the assistance of Kate Hutchinson, LLB(Hons) Waikato, of Palairet Law, in preparing this paper.

Metering and Reconciliation Information Agreement (`MARIA').
2 New Zealand Electricity Market (`NZEM').
3 Multilateral Agreement on Common Quality and Security ('MACQS').

ance rules and regulations if the industry was unable to agree to a satisfactory arrangement itself. Apart from the process of actually drafting the EGEC version of the Electricity Governance Rules, the formal hurdles for the process were to obtain a Commerce Commission authorisation and to pass an industry referendum supporting the EGEC Rulebook.

The Commerce Commission provided a conditional authorisation of the EGEC rules in October 2002. After further negotiations, especially with Transpower and Meridian, the 'referendum version' of the EGEC Rulebook was put to industry and consumer groups in a referendum in May 2003. The EGEC Rulebook effectively fell over at the final hurdle. Transpower, Meridian and consumer representatives voted against the EGEC Rulebook, and EGEC failed to achieve the necessary 75 per cent support from the industry.

The government therefore decided to exercise the powers available to it under the Amendment Act. The Electricity Governance Regulations 2003 were made by Order in Council on 15 December 2003. They came into force on 16 January 2004. The Electricity Governance Rules 2003 were gazetted by the Minister of Energy on 18 December 2003, and they came into force on 1 March 2004.

This article discusses the regulation of the electricity industry through the implementation of the Amendment Act — once seen as 'backstop regulation' — and some of the instrument-choice decisions that have been made in the regulations and the rules. The first parts discuss the Amendment Act, the role of the Electricity Commission and ministerial directions under that Act. They also discuss the making of regulations and rules. The article then proceeds to discuss the government regulation model in more detail, including the role of service providers, regulations and rules, and so-called 'special' provisions. In some respects the regulatory model has simply adopted the contractual rules that have been applied by the industry, but there are also instances where it has been necessary or desirable to modify those contractual rules to conform to the new model. There are also important contractual underpinnings to the operation of the wholesale electricity market that remain despite the regulatory intervention that has occurred.


The Amendment Act inserted a new Part 15 into the Electricity Act 1992. Part 15 establishes the 'Electricity Governance Board' (`EGB'). The EGB is now informally known as the Electricity Commission. (The new name

is being formalised by the Electricity and Gas Industries Bill 2003.) The Amendment Act was passed on 7 August 2001, but Part 15 did not come into force with the rest of the Act. Part 15 was required to be brought into force by a separate Order in Council made on the recommendation of the Minister of Energy under sections 3 and 4 of the Amendment Act.

This can be seen as 'backstop regulation'. The government's stated preferred position was for the electricity industry to agree on a set of rules and arrangements that would meet the government's policy objectives.4 It would only be necessary to establish the Electricity Commission by bringing Part 15 into force if industry self-regulation failed. In the meantime, the backstop alternative and its implications would be transparent.

There were two processes by which the Minister could recommend that an Order in Council be made bringing Part 15 into force and bringing the Electricity Commission into existence. One process was for the Minister to publish a notice stating the intention to recommend making of the Order in Council and the reasons for that intention, and for the Minister to consider submissions on the proposals. The Order in Council could then be made not less than three months from the publication of the notice. The intention of this 'notice and consultation' process was for the industry to be given a final three month period to agree to a self-regulatory approach, and to avoid the need for the government to have recourse to the legislative solution under the Amendment Act. The alternative process was for the Minister to recommend the making of the Order in Council without the need for a notice or consultation period. This process would apply if the Minister 'considers that it is necessary or desirable in the public interest that the Order in Council be made urgently': section 4(3).

With the failure of the referendum on the EGEC Rulebook in May 2003, the Minister decided it was desirable in the public interest to proceed urgently to establish the Electricity Commission. That decision was influenced by the 'winter power crisis' that was occurring at the time, and

4 Government Policy Statement December 2000 < package2000/gps>:

31. The Government favours industry solutions ahead of regulation. However implementation of these changes must be timely and effective. The electricity industry is invited to move quickly to put in place the new governance structure.

33. The Minister requests a specific report by 28 February 2001 on progress in establishing the Governance Board that meets the Government's design principles. If there has been insufficient progress, the Government will regulate to establish the Governance Board.

the need of the Electricity Commission to become involved in developing and implementing steps to improve security of supply. The result was that on 15 September 2003 the Electricity Commission was brought into being and the commissioners were appointed.


The Electricity Commission (at the time of its establishment still formally known as the 'Electricity Governance Board') is a 'Crown entity', which primarily means that it is a separate legal entity with members appointed by the Minister. As a Crown entity, the Electricity Commission is subject to the accountability mechanisms in the Public Finance Act 1989 and the Public Audit Act 2002. It is also subject to the Official Information Act 1982 and the Ombudsmen Act 1975.

The principal objective of the Electricity Commission (section 172N) is:

to ensure that electricity is generated, conveyed, and supplied to all classes of consumers in an efficient, fair, reliable and environmentally sustainable manner.

In addition to the overriding principal objective, the Electricity Commission has the following functions under section 1720:

(a) formulate and make recommendations concerning electricity governance regulations and rules in accordance with this subpart:
(a) administer, monitor compliance with, enforce, and apply penalties or other remedies for contraventions of electricity governance regulations and rules:
(a) establish, operate, and facilitate the operation of (by contracting with other parties, entering into a joint venture company or contractual arrangement, or other means) markets for industry participants:
(a) develop best practice distribution pricing methodologies and other standards and model agreements for use by industry participants:
(a) provide advice to the Minister on matters concerning the electricity industry.

The section 1720 functions indicate that electricity governance regulations and rules are central to how the Electricity Commission will operate. The Electricity Commission has the function under section 1700(1)(a), and the obligation under section 172W, to formulate and make recommendations to the Minister concerning electricity governance regulations and rules. When the regulations and rules are made, the

Electricity Commission has the function of administering, monitoring compliance with, and enforcing the regulations and rules.

The role of the Electricity Commission is therefore very much that of an industry-specific regulator, proposing and administering regulations and rules. This makes it a very unusual body in the New Zealand context.


In addition to the principal objective in section 172N and the functions in section 1720, the Electricity Commission is also required to follow any ministerial directions given under section 172ZA. These directions may include a direction to carry out any other functions, or to give effect to a government policy statement.

The Electricity Commission is therefore explicitly an instrument of the Crown that will implement government policies, rather than being an independent regulator that is required to determine its own policy settings.

There are checks and balances in place regulating the amount of ministerial influence over the Electricity Commission. First, a section 172ZA ministerial direction must be transparent. A ministerial direction is required to be published in the Gazette and presented to the House of Representatives. The Minister is also required to consult the Electricity Commission before any direction is given. The first government policy statement to be given to the Electricity Commission was put out for general consultation, which is a requirement of best practice rather than a statutory requirement.

Secondly, there are limits to the nature of any section 172ZA directions within section 172ZA itself. Directions must be consistent with the functions and principal objective of the Electricity Commission: section 172ZA(2). Otherwise they would be ultra vires the Amendment Act. Directions must also be sufficiently general so as to not require the Electricity Commission to make a particular decision, or do a particular act, in relation to a particular person: section 172ZA(4).5

The third check and balance is that the Electricity Commission's functions include making recommendations to the Minister on electricity

5 There is an exception for Transpower — the state-owned enterprise transmission


governance regulations and rules (section 1720(1)(a)), and on other matters concerning the electricity industry: section 1700(1)(e). A government policy statement is likely to be given effect through changes to the electricity governance regulations or rules recommended by the Electricity Commission. The Electricity Commission is required to consult with representatives of persons likely to be substantially affected by these recommendations when it formulates the recommendations: section 172Y. The Minister is not bound by an Electricity Commission recommendation, but is required to have regard to the recommendation and may, in his or her absolute discretion, decide how to respond to the recommendation. If the Minister does not follow a recommendation then he or she must publish a notice explaining the reasons for not following a recommendation in the Gazette.


The Amendment Act includes extensive regulation-making powers, authorising the making of electricity governance regulations under which the electricity market is required to operate. There are two categories of `electricity governance regulations' under the Amendment Act. Under section 172D, regulations may be made in relation to the wholesale electricity market and the transmission of electricity from generators to local lines companies by Transpower. These regulation-making powers assume the electricity market is being comprehensively regulated, and regulations may only be recommended to the Governor-General by the Minister under these powers if the Electricity Commission has been established (section 172E).

Under section 172F, the second category of electricity governance regulations may be made, whether or not the Electricity Commission has been established. These regulations relate to more specific policy issues than the more sweeping regulation-making powers under section 172D. The policy issues covered by the regulation-making powers in section 172F include:

The purposes for which regulations may be made under section 172D are significantly higher-level and more comprehensive than the purposes for which regulations may be made under section 172F. Section 172D(2) says the purposes of the regulations are:

(1) The Governor-General may, by Order in Council made on the recommendation of the Minister in accordance with section 172E, make regulations for all or any of the purposes in subsection (2).
(1) The purposes are
Wholesale electricity market
(a) providing for the establishment and operation of wholesale markets for electricity, including for pricing and determining quantities of electricity for market transactions; for clearing, settling, and reconciling market transactions; for scheduling and dispatching electricity; for disclosure of market information; for minimum prudential standards for market participation; and for minimum standards of market conduct:
(a) requiring participants in wholesale electricity markets or classes of

participants to comply with the matters in paragraph (a):

Transmission of electricity

(a) prescribing reasonable terms and conditions on which Transpower must enable distribution lines and generators and users of electricity to be connected to the national grid, and that must be complied with in connecting to the national grid:
(a) regulating the way in which expansions, replacements, or upgrades of the national grid or parts of the national grid must be evaluated, carried out, and funded, including specifying—
(e) setting quality and security standards for the transmission system or parts of the transmission system, or for the use of that system or part, and requiring industry participants to comply with those standards:
(e) requiring the use by Transpower of a specified methodology or component of a methodology for allocating Transpower's revenue requirement to individual electricity generators, electricity retailers, electricity distributors, line owners, customers, or consumers, or classes of any of those persons, including —

Section 172D(2)(a) encompasses all the features necessary for buying and selling electricity on the wholesale market, including for establishing and operating that market. The strategic decision made in passing the Amendment Act was that the wholesale electricity market could be regulated through the Electricity Commission administering comprehensive regulations. Section 172D(2)(a) is the most important single regulation-making power through which that decision is given effect.

Having said that, the content of the rules and regulations through which the wholesale electricity market operates is not generally controversial. The pre-regulatory rules were established by multilateral contracts among the industry participants from 1994. As will be discussed below, the change from a multilateral contract model to a regulatory model has been significant, but in terms of content of the rules relating to the operation of the wholesale market, the difference is more a matter of form than substance.

On the other hand, the issues to do with the transmission of electricity that the regulation-making power in sections 172D(2)(c) to (f) deal with have been intensely controversial within the electricity industry. The EGEC referendum version of the industry self-regulation rules dealt with setting quality and security standards for the transmission system (section

172D(2)(e)), but it did not do any of the other things that regulations may be made for under sections 172D(2)(c), (d) or (f).7

The final group of regulation-making powers that are relevant for present purposes are the 'supplementary provisions' in section 172J. Most significantly, these regulation-making powers provide for:

(d) and (f);

Section 172K also provides for offences and penalties on summary conviction for breaching the regulations of up to $20,000 (section 172K(a)), and for compensation, civil penalties and other actions in respect of contravention of the regulations (section 172K(b)) and for rights of appeal and review (section 172K(c)).


Regulations are the most formal category of delegated legislation. Regulation-making powers and primary legislation are required to authorise the making of regulations that have the force of law. The Executive Council advises the Governor-General to make Orders in Council that are required to give effect to the government's decisions. Regulations are required to be drafted and certified by Parliamentary Counsel, and they are published in the 'Statutory Regulations Series'.8 `Rules' are generally a less formal category of delegated legislation. Sometimes they are authorised by regulations rather than primary legislation, in which case they may be called 'tertiary' legislation.

Section 172H of the Amendment Act authorises the Minister to make `rules' for all or any of the purposes for which an electricity governance regulation may be made. Rules made under this provision cannot be

  1. Section 172D(2)(c), prescribing reasonable terms and conditions for connection to grid; s 172D(2)(d), regulating expansion, replacements, or upgrades with the national grid, or parts of the national grid; and s 172D(2)(0, requiring Transpower to use a specified methodology for allocating its costs to individual customers or classes of customers.

8 Acts and Regulations Publication Act 1989.

2004 • Electricity Governance Rules and Regulations 43

called 'tertiary' legislation because they are authorised by the primary legislation. The rules are therefore in a category of delegated legislation that ranks alongside regulations. Technically they are 'deemed regulations'. Section 172H(6) says that rules are subject to the regulations to the extent that the rules and regulations are inconsistent. To that extent, the electricity governance rules can be seen as ranking in priority below the regulations, but given that there should not be any contradictions between the rules and regulations, this priority is more notional than real.

The two main differences between electricity governance regulations and rules under section 172H are:

Section 17214(2) sets out a set of criteria for the Minister to take into account in deciding whether to make a rule or to recommend the making of regulations. The criteria are taken from the Regulations Review Select Committee guidelines on when deemed regulations are appropriate.9 The criteria are:

The electricity governance rules and regulations will always primarily deal with the rights and interests of the electricity industry participants, rather than particular individuals or the general public. They will also tend to contain detailed or technical matters because of the nature of the electricity industry and the wholesale electricity market. Therefore most of the electricity governance provisions can be expected to be included in the rules rather than the regulations. Because the rules will be such an important part of the regulatory framework for the electricity industry, it

Regulations Review Committee Digest, Occasional Report 13.3 Delegated Legislation, available <>.

was decided that they should be subject to the Regulations (Disallowance) Act 1989 and the jurisdiction of the Regulations Review Select Committee.

It is unusual to have included the Regulations Review Committee criteria for making rules in the Amendment Act. One of the consequences of having the criteria in the legislation is that they become a statutory obligation and limitation on the power of the Minister to make rules. Section 172H(7) was included to mitigate the disruption for the electricity market that may occur if a court holds that a rule has been made in breach of the section 172H(2) criteria. In that case a court could hold that the rule is invalid and void, but section 172H(7) says that any order to that effect by a court cannot take effect for six months. This is intended to allow time to make alternative rules or regulations, so there will not be a gap during which time no rule or regulation applies on a particular issue.


The government moved quickly to establish the Electricity Commission and to prepare electricity governance regulations and rules following the failure of the EGEC Rulebook referendum to support the self-regulatory proposal.

The plan was to strip the controversial governance and decision-making processes out of the EGEC referendum version of the industry Rulebook, and to adapt the technical rules developed by EGEC to the statutory instruments available under the Amendment Act. So instead of industry participants agreeing to be bound by the EGEC Rulebook, the regulations and rules would have the force of law and would apply mandatorily. The processes for negotiation and voting on rule changes that had been proposed for the EGEC version and which had been very controversial within the industry would no longer be required because the processes for making and amending statutory regulations and rules are set out in the Amendment Act.

One of the consequences of this change in approach was the need to remove all the 'membership' language in the EGEC rules. The membership language has been replaced in the electricity governance regulations and rules by references to 'participants', which is a defined term. The Electricity Commission is specifically excluded from being a 'participant', so the electricity governance regulations and rules are not enforceable against it in the same way as they are enforceable against the participants. This reflects the status of the Electricity Commission as a

regulator standing above the market, rather than standing in the market among the participants. All participants are required to apply to be `registered' by the Electricity Commission, although registration has no effect on their ability to participate on the electricity industry. The only effect of registration is that the register will provide a comprehensive list of contact details for the participants. 'Registration' under the regulations is not a licensing or quality control system.


One of the issues in putting together the package of regulations and rules was determining where the demarcation between the different legal instruments should be made.

Under the existing multilateral contract model, the 'rules' were in fact contractual undertakings that the members chose to be bound by, although they were expressed as rules. The multilateral contracts bound the self-regulating members of the industry who were generators, retailers, the transmission company and lines companies, as well as other industry participants who were 'service providers'. The service providers were paid to provide the services necessary to operate the wholesale market. These service providers included the systems operator, a registry of customer details, the reconciliation manager, pricing manager and clearing manager, and a market administrator. In the multilateral contract context, the service providers were parties in their own right, and they were contractually bound to the rest of the industry. Their service provider contracts, including their remuneration and performance obligations, were annexed to the multilateral contract, and the service provider contracts were enforceable by all the 'members' of the market. The EGEC Rulebook built on this model, so the incumbent service providers would have continued to be parties to a single industry-wide multilateral contract.

The move away from the multilateral contract model and the creation of the Electricity Commission which is responsible for the operation of the wholesale electricity market meant that the arrangements with the service providers needed to be redesigned. The critical point was that the current market arrangements were in place and working. Incumbent service providers were providing the services necessary to operate the wholesale electricity market.

It was clear that the service providers were absolutely necessary, and it would have been impractical and unnecessary to bring the wholesale

market functions of the reconciliation manager, clearing manager and pricing manager within the Electricity Commission. Each of these service providers employed its own expert staff, and had the computer software that is used to operate the wholesale electricity market. The most strategic service provider is the system operator who is responsible for calling on generation and dispatching electricity through the national grid. Transpower carries out this role, and the system operator function is integrated with Transpower's other functions as the owner of the transmission system and the provider of transmission services. The market administrator carries out a co-ordination role between the various service providers and the other market participants.

The obvious choice was for the Electricity Commission itself to contract with the service providers. In particular it would take responsibility for paying the service providers, and the Electricity Commission could recover the cost through an industry levy.10 This would essentially be a readjustment of the current arrangements, with the Electricity Commission interposing between the service providers and the other industry participants.

The problem with this scheme was that the participants in the market would have lost their recourse to the service providers through a direct contractual relationship with them. The Electricity Commission would have become a principal responsible for the performance of its service provider agents, and there would have been no clear legal relationship between the service providers and the industry participants to whom they provide their services. As well as being a disadvantage for the market participants, it would also have created a new range of obligations and duties on the Electricity Commission because it would have had to represent the interests of the very parties it has been established to regulate.

One way of dealing with this problem was to use the provisions of the Contracts (Privity) Act 1982 to name the electricity industry participants as beneficiaries with rights of enforcement under the contracts between the Electricity Commission and the service providers. This would have relieved the Electricity Commission from the primary responsibility to enforce the terms of the service provider contracts on behalf of the market participants.

Section 172ZC of the Electricity Amendment Act 2001 provides a regulation-making

power to set levies recoverable from industry participants to cover the costs of performing the Electricity Commission's functions, powers and duties.

Another option was to put the market rule elements of the EGEC Rulebook into electricity governance regulations and rules, and to continue with the multilateral contract model for the service provider elements of the wholesale electricity market. However, this would have involved the Electricity Commission itself either being a party to the new multilateral contract with industry participants and service providers, or alternatively stepping back and allowing a variation of industry self-regulation to continue. Given that the Electricity Commission has been established as a regulator responsible for the operation of the wholesale electricity market, none of these options was appropriate.

The decision was therefore taken to create a hybrid regulatory and contractual model. The obligations of the service providers were put in the electricity governance regulations and rules, and that enables these obligations to be enforceable by industry participants without having to go through the Electricity Commission. If a service provider breaches its obligations to an industry participant, then that is a breach of the electricity governance regulations or rules that is actionable by the participants and the Electricity Commission under the regulations.

However, the selection of the service providers is still contractual — the Electricity Commission is required to agree with individual service providers that they will assume the obligations on them under the electricity governance regulations and rules. The price and term for which the service providers will provide these services under the regulations and rules is a contractual matter for negotiation with the Electricity Commission. Transparency is achieved through requiring all the service provider contracts to be published.

The risk inherent in this design is that the incumbent service providers would decide not to contract to accept the regulatory obligations under the electricity governance regulations and rules. If that happened, the current market arrangements could not have continued and alternative service providers would have had to be found. This would have inevitably delayed the implementation of the new electricity governance regulations and rules. In part, these risks were mitigated by the fact that the service providers are all incumbent providers with profitable businesses to preserve. It also meant that the service providers were effectively in a position to negotiate the terms of the regulations and rules as well as the prices and terms of their service provider contracts.

The Crown's position was also protected through this process by waiting until the service provider contracts were agreed and executed before making the electricity governance regulations and rules. If the Crown had been forced to delay making the electricity governance regulations and rules while a contestable process was followed to find the service provider that was prepared to accept the role, then that could have occurred. NZX publicly called for the appointment of M-Co Limited as market administrator to be made contestable from the beginning of the operation of the new regulations and rules. This clearly added pressure to the negotiation of the market administrator service provider contract.

As it happened, the processes converged in the week before Christmas in 2003, and in the end all the service provider contracts were duly executed. Service providers have all effectively contracted into a range of regulatory responsibilities.


Another instrument choice decision was the demarcation between the regulations and rules, as discussed above. Under the EGEC referendum version and its multilateral contract precursors, there was only one category of 'rules'. However, as we have noted under 'Electricity Governance Rules', the Amendment Act provides for regulations and rules to be made, and the question arose as to whether all the EGEC provisions could be included in rules made by the Minister with no regulations required at all. We have noted the criteria in section 172H(2) to help determine which provisions should be rules rather than regulations. The matters that bore on the application of these principles were as follows.

relevant to these provisions were all required to be included in the regulations.


  1. Registration

Applying the above principles, it was necessary to include the Electricity Commission's obligation to register participants and to publish an up-to-date register in the regulations. Early versions of the draft regulations had the Electricity Commission determining eligibility for registration, which was a close proxy for 'membership' under the multilateral contract model. This was one of the 'governance' issues that had been most controversial in the EGEC process, and the fact that the Electricity Commission might have had the power to exclude participants from the industry under a registration system was also controversial.

The position finally adopted is that registration is no more than an information-gathering exercise that identifies who the participants in the market are. There are various other controls on the ability of parties to participate in particular roles throughout the rules and regulations. For example, there are prudential requirements to establish the creditworthiness of buyers and sellers of electricity in the wholesale market under Part H of the Rules, and service providers are selected by entering into a service provider contract with the Electricity Commission. However, none of these qualifications are relevant to registration as a participant.

  1. Rulebook Information

Another subject that affects the Electricity Commission directly and is therefore in the Regulations relates to 'Rulebook information'. The provisions on this subject are similar to those included in the EGEC Rulebook, and they provide for information passing between any two participants to be available more widely. The approach is loosely based on the Official Information Act 1982, except most participants are not

bound by that Act, and the EGEC proposal placed the regulator in the middle of the information flows. So if one participant wants Rulebook information from another participant, the request for the information passes through the Electricity Commission.

The Electricity Commission is itself subject to the Official Information Act 1982 as a Crown entity, and its obligations under that Act cannot be affected by contract or any form of delegated legislation. The Rulebook information provisions in the Regulations add a new range of powers and duties for the Electricity Commission."

C. Service Providers

When the decision was taken to use a hybrid contract and regulatory structure for the service providers, it quickly became obvious that the Regulations needed to include a specific section on service providers. Various service providers have different obligations under different rules, and it would have been undesirable and impractical to bring them together in one place. But there are some provisions of general application for service providers, and others that include obligations on the Electricity Commission. These have all been included in Part 2 of the Electricity Governance Regulations. The primary obligation is of course the obligation on the Electricity Commission to enter into service provider contracts with functions, terms and prices to be negotiated. The service provider contracts must also be published.

Transpower has a special status as system operator, which is the most significant service provider function. The Electricity Commission is directed to appoint Transpower as the system operator. If the system operator function was ever to be made contestable, it would be necessary to amend the regulations. This was intended to provide a level of certainty for Transpower and the market generally.

Other provisions that apply generically to service providers include a standardised force majeure clause and provisions covering performance standards, accountability and reviews. Under the multilateral contract model, all the service providers had the benefit of force majeure clauses. The force majeure clause relieves the parties to a contract from their obligation to perform a contract if events outside their control prevent them from doing so. Typically such events include 'acts of God'. When

II Electricity Governance Regulations Part 1, subpart 2 — Availability of Rulebook Information.

the obligations of the service providers shifted from being contractual to being regulatory, the force majeure clauses in the contracts would no longer have been effective. It would not have been possible for the service providers to contract out of their regulatory obligations, even in the face of an 'act of God'. This illustrates the limitations on the contract side of a hybrid contract and regulatory arrangements.

Similarly it would have been possible for the Electricity Commission to have contracted for performance standards to be set, and for accountability and review processes to be established for service providers. But there is a wider public interest in these governance issues, and the Electricity Commission itself has an obligation to manage the performance of the service providers effectively and efficiently. Therefore the decision was taken to include these provisions in the Regulations, rather than leaving them for the individual service provider contracts.

D. Enforcement

The Amendment Act requires enforcement powers for the Electricity Governance Regulations and Rules to be included under regulations rather than rules.

The enforcement mechanisms under the multilateral contract model were through the 'Market Surveillance Committee', which was supported by M-Co as market administrator. This was essentially a private quasi-judicial body that operated similarly to an arbitration panel. It had jurisdiction over the members of the market, with the power to fine, order compensation and make orders for costs. Any fines or costs received were retained to defray its expenses. The Market Surveillance Committee was chaired by a retired Court of Appeal judge, and its work varied from minor technical matters to high-value commercial litigation.

The EGEC proposal was to roll forward the existing Market Surveillance Committee arrangements on the same contractual basis as they had been set up under. However, the translation of those arrangements into a regulatory model was more complicated than that. The relationship between the Rulings Panel and the Electricity Commission needed to be determined; should the Rulings Panel be a subcommittee of the Electricity Commission, under the direct influence of the Commission? Should it be totally independent, with members appointed by the Minister, or the Governor-General? Equally, should the Electricity Commission or the Minister be subject to the Rulings Panel? Should the Rulings Panel be adjudicative, or should it have its own investigative powers?

The decision was to establish the Rulings Panel as a separate and impartial body, with members appointed and funded by the Electricity Commission. It has jurisdiction to hear complaints and resolve disputes that arise under the Electricity Governance Regulations and Rules. There is no jurisdiction over parties other than participants, and it has no authority over the Electricity Commission. The powers of the Rulings Panel, and the processes under which it is established and will operate, are all set out in the regulations. The Rulings Panel may determine its own procedures, but it is subject to the requirements of natural justice: regulation 95. If it fails in that regard, it will be subject to judicial review. There are a wide range of remedies available to the Rulings Panel, including the power to order compensation and 'civil pecuniary penalties' up to $20,000 (regulation 107). Appeal rights are limited to appeals on jurisdiction and judicial review, and appeals on questions of law.

E. Special Provisions Relating to Comalco Agreements

The EGEC Rulebook included a `ringfence' provision that would have exempted Comalco Power (NZ) Ltd, Meridian, and Transpower from compliance with the Rules. The intention was to preserve the parties' rights and obligations under the various Comalco agreements 'just as if the rules had never been made or come into force': 3

The reason for this special treatment was that the Comalco agreements are long-term contracts, originally entered into by the Crown in 1963, that provided for the delivery of electricity to Tiwai Point with a higher standard of reliability and security than is provided for other parts of the electricity system. The Comalco parties, and particularly Meridian, which has taken over the Crown's primary responsibility for the delivery of electricity to Comalco, were concerned that their respective rights and obligations would be compromised under the EGEC regime. The ring-fence provision was also an attempt — in the face of resistance from other generators — to persuade Meridian and Transpower to vote in favour of the EGEC Rulebook and the industry referendum. In the end, both Meridian and Transpower voted against the EGEC Rulebook.

When the Minister and the Crown had to consider whether the Comalco ringfence was justifiable as a matter of public policy, it was decided that in principle it was. The government has the legal right to legislate across

12 Electricity Governance Regulations Part 9.
13 EGEC referendum version Part A section XIII.

Comalco's rights under the Comalco agreement, but it would not be justifiable from a public policy perspective to do so in this case.

The first consultation draft of the Electricity Governance Rules included a revised version of the Comalco `ringfence' provision. But in the consultation the Comalco parties asked that the provisions be in the regulations because they would have a higher status than rules. The formalities around amending the regulations would, at least in theory, be more rigorous than the process for amending rules. The parties claimed they would have had a greater sense of security if the exemption was in the regulations. The ability to make rules or regulations exempting any person or class of persons from the Electricity Governance Regulations and Rules is included in section 17241)(e) of the Amendment Act. It would therefore have been possible to make a rule exempting the Comalco parties from the application of the Electricity Governance Rules. However, it would not have been possible to make a rule exempting the Comalco parties from the application of the regulations, because section 172H(6) of the Amendment Act says the regulations prevail in the case of any inconsistency with the rules. Another factor that led to the Comalco 'special provisions' being included in the regulations rather than the rules was that the final redesign of the provisions included a range of obligations on the Electricity Commission. As a general proposition, obligations on the Electricity Commission are in the regulations rather than the rules.

The final position is that the Comalco parties are required to comply with the Electricity Governance Regulations and Rules, except from Part C and G of the rules. The exemption from Part C and G of the Rules applies to the extent that it is necessary for Comalco parties to breach the rules to perform an obligation or exercise a right under the Comalco agreement. Parts C and G concern the quality and security of supply through the transmission grid and the process for buying and selling electricity through the wholesale electricity market.

There is a high degree of disclosure required from the Comalco parties. The Comalco agreements have always been subject to commercial confidentiality, so their nature has not been widely known. Now the Comalco parties will be required to disclose the Comalco agreements to the Electricity Commission. They must also publish a summary of the Comalco agreements that describes how those agreements may affect the Comalco parties' ability to comply with Parts C and G of the Rules. If the Comalco parties do not prepare the summary by 1 June 2004, the Electricity Commission itself is required to publish its own summary.

The other condition for the Comalco parties to take advantage of the exemption is that the Comalco parties must notify the Electricity Commission of any acts or omissions that may have been in breach of Part C or G of the Rules. The Electricity Commission then has the opportunity to determine whether or not the notified breach was necessary to meet the obligations or exercise the rights under the Comalco agreement. The Electricity Commission decides that the notified breach was not necessary, or if there is a breach that is not notified, then the act or omission will be treated in the same way as a breach by any other participant.


The Rules are structurally very similar to the EGEC Rulebook. The main difference is that Part A of the EGEC Rulebook contained 'governance' provisions which are no longer required in the rules. To the extent that they are required in a modified form, the governance provisions are now included in the regulations. Part A of the Electricity Governance Rules now contains the definitions section.

There are two sections that were missing from the EGEC Rulebook package, they are Part B, dealing with consumer issues, and Part F covering rules and processes for transmission investment and pricing. Both of these parts of the rules are due to be included at a later date.

Parts that are in the Rules are as follows.

Part C — Common Quality. This Part relates to the quality (voltage and frequency) of electricity and maintaining system security. Part C includes obligations for the system operator, asset owners (direct consumers, distributors and generators) and arrangements concerning ancillary services.

Part D — Metering Arrangements. These rules set out:

Part E — Registry Information and Customer Switching.

Part G — Trading Arrangements. Provides rules for a 'gross pool' for wholesale electricity, including:

Part H— Implementation and transmission. Provides arrangements for the sale and purchase of wholesale electricity, including:

Part I — Implementation and Transition. Provides for the transition from MARIA, NZEM and MACQS or Common Quality Obligations.

The most controversial parts are Part C and Part G. (These were the parts that the Comalco parties sought an exemption from.) The most significant change in Part.0 from the EGEC Rulebook is that the contractual undertaking of the systems operator to effectively use best endeavours has now been translated to a requirement to meet 'principal performance obligations'. Transpower, which is the system operator, has a legally enforceable obligation to meet the standard of a reasonable and prudent operator. The most controversial aspect of Part G is that all electricity bought and sold through the wholesale market is required to be offered and bid for through the market rules. This is called the 'mandatory pool'. There is no scope for off-market bilateral trades, which obviously has a bearing on the Comalco arrangements.

Another controversial aspect concerned the treatment of 'embedded generation', which is small-scale generation connected to local lines network rather than the national grid. The EGEC Rulebook did not contain provisions that would have facilitated distributed generation, whereas the government's policy setting is to encourage small scale generation, especially from renewable sources. This deficiency has been addressed in the Electricity Governance Rules.


This article has described the Electricity Amendment Act 2001 and the establishment of the Electricity Commission following the failure of an industry self-regulation model. It also describes the government

regulation model and instrument choice decisions that followed the establishment of the Electricity Commission.

The making of regulations and rules controlling the electricity industry is the most intrusive regulatory intervention in a specific industry that New Zealand has seen for 20 years. The regulatory intervention has been able to deliver policy outcomes where the competing interests of different market participants were intractable. It has also been able to deliver `circuit breakers' in a number of areas where the industry could not achieve agreement, especially given the failure of the industry to sufficiently support the terms of the negotiated EGEC Rulebook. The final package however still contains elements of a hybrid regulatory and contractual design. So while the EGEC process exposed the deficiencies of industry self-regulation through a multilateral contract mechanism, important aspects of the regulated market still depend on a contractual underpinning.

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