Duynhoven Harry: Electricity Industry Reform Amendment Bill — First Reading 
Duynhoven Harry: Electricity Industry Reform Amendment Bill — First Reading 
[Volume:644;Page:13981] 
Hon HARRY DUYNHOVEN (Associate Minister of Energy) 
: 
 I move  
That the Electricity Industry Reform Amendment Bill be now read a first time. 
 I will be recommending that the bill be referred to the Commerce Committee for consideration. 
The Electricity Industry Reform Act of 1998 required ownership separation between electricity lines companies and electricity supply companies in order to facilitate competition in the electricity industry. The Act was amended in 2001 and again in 2004 to encourage lines companies to invest in generation—in particular in “new renewables” provided they did so in separate companies and complied with arm’s-length rules. In practice notwithstanding these amendments there has been little investment in generation by lines businesses. Lines companies submitted that the amendments did not go far enough and that barriers remained to their investing in generation. The purpose of this amendment bill is to address the issues that discourage lines companies from investing in renewable generation while retaining key restrictions on cross involvement between a company’s lines and generation activities. 
The bill achieves this through three main policy changes. The first policy change is intended to make it easier for owners of lines businesses to sell the output of the generation they were permitted to own under the 2001and 2004 amendments to the Act. The objective here is to encourage the owners of lines businesses to invest in permitted generation especially generation from new renewable energy sources. This policy objective will be achieved by allowing lines companies to retail up to 100 percent of the nominal annual output capacity of their permitted generation. This is an improvement on the existing Act where allowable sales are restricted to the actual output of the generating station. In situations where this generation has a variable output such as on a wind farm this places a significant restriction on the company’s ability to sell the electricity it generates. Lines companies will also be allowed to trade in financial hedges without restriction in order to manage their risks. 
The amendment bill proposes a number of significant changes to corporate governance rules intended to lower the costs of corporate separation and compliance with arm’s-length rules. The threshold for compliance will be raised to 10 megawatts an increase from the present limit of the higher of 2 megawatts or 5 percent of maximum demand. Currently a lines company intending to operate in both lines and generation or retail activities needs separate boards and management structures. The proposed amendments will relax the separate board member requirement thus allowing the same person to be a director of both the lines and the supply businesses provided that there is at least one independent director excluding executive directors. In addition the same person will be able to be the manager of both companies when the companies supply up to a threshold of 30 megawatts. 
The second main change is to narrow the scope of ownership separation requirements to focus on geographical areas where there is potential for the exercise of market power and anti-competitive practices namely where lines and supply are co-located. This will be achieved by allowing owners of lines businesses to be involved in generation and retailing without limit outside their lines area. In addition requirements for corporate separation and compliance with arm’s-length rules outside the lines area will be repealed. Existing ownership separation rules will be retained where lines and supply are co-located. This is because co-owned co-located lines and supply businesses have both the incentive and the ability to lessen competition in retailing and local generation. Ownership separation removes this incentive and ability. 
The third main change is to amend the definition of renewables. Currently the owner of a lines business may only invest without quantity limitations in “new renewables” which are defined to exclude hydro and geothermal generation using traditional technologies. This new definition includes all renewables to reflect the Government’s policy of encouraging the development of renewable energy. 
The amendment bill is an important element in the New Zealand Energy Strategy. By facilitating lines company construction of renewable generation and the selling of the output these proposals will contribute significantly towards our 90 percent renewable energy target. At the end of the debate I will move that the Electricity Industry Reform Amendment Bill 2007 be referred to the Commerce Committee for consideration.