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Regulatory developments for electricity distributors on their way in 2019

February 04, 2019


Partners Anne Callinan, James Craig, Michael Sage, John Shackleton, Simon Vannini
Special Counsel Chris Browne

2019 is set to be a busy year for electricity distributors. As well as the Commerce Commission resetting the default price-quality path for electricity distributors, there are other significant regulatory developments in the pipeline. We summarise those in this FYI.

Distribution and transmission pricing

The first report of the Electricity Price Review described current distribution pricing as “outdated”. Most consumers pay a flat amount per kWh for distribution services regardless of when the electricity is used. This does not take into account peak usage across the network which is a significant driver of network investment. This misalignment will get worse with the predicted uptake of electric vehicles and electrification of the economy generally.

The Electricity Authority is now consulting on changing the Distribution Pricing Principles. These are principles for how distributors set their prices which were first published by the Electricity Commission in 2010. The Distribution Pricing Principles are not binding or prescriptive, so distributors will retain flexibility to design their own pricing plans. However, the Authority signals in the consultation paper that it expects distributors to transition to pricing plans that use static or dynamic peak charges for network use and fixed charges for network access. The Authority intends to assess annually how well distributor pricing plans align with the new principles and publish star-ratings. Submissions on the Authority’s consultation paper close on 19 February.

Transmission pricing is also on the agenda in 2019. The Authority intends to restart the process of setting new transmission pricing methodology guidelines, on the basis of which Transpower will be required to draft a new transmission pricing methodology. Consistent with its proposals in 2017, which did not progress due to problems with the cost-benefit analysis supporting them, the Authority says it intends to replace the current interconnection and HVDC charges with new benefit-based and residual charges. This will result in wealth transfers amongst distributors and between distributors and other industry participants, although we expect those transfers to be less pronounced given the industry and political reaction last time. The Authority intends to start consultation on the new guidelines in June 2019.

Default distribution agreement

The Electricity Industry Participation Code (Code) does not contain a default agreement for electricity retailers’ use of distribution networks (default distribution agreement or DDA). The Authority has published model distribution agreements but they have not been widely adopted. The Authority intends to introduce a DDA in order to simplify and standardise contractual arrangements between distributors and retailers.

The Authority’s first foray into this area ended up in court. Vector (and Entrust, Vector’s principal shareholder) challenged the Authority’s proposal to prescribe standard contract terms for distribution agreements and prohibit individually negotiated terms. The Authority prevailed in the High Court, but in November 2018 the Court of Appeal allowed Vector’s appeal in part. In a preliminary decision[1] the Court of Appeal decided that, while the Authority can impose standard terms for distribution agreements via the Code, it cannot impose a blanket prohibition on the parties negotiating other terms that are not inconsistent with the prescribed ones (as the Authority had proposed to do).

The Authority says it will continue to develop its DDA proposal.

Review of tree trimming regulations

The Minister of Energy and Resources has announced a full review of the Electricity (Hazards from Trees) Regulations 2003 to take place during 2019. MBIE is expected to release a consultation paper in the second half of the year.

Outages caused by trees contacting lines are common, and vegetation-related maintenance is a very significant cost for electricity distributors. The Regulations are not effectively mitigating these issues. A review of the Regulations is overdue.

Some changes that should be considered are:

  • increasing the growth limit zone around conductors;
  • extending the Regulations to d eal with fall-distance trees; and
  • providing clear rights for network operators to come onto private property to carry out tree trimming or felling to protect their lines, including when the tree owner cannot easily be contacted or does not respond to notices.

If you would like to discuss any of these matters and how they may directly affect your organisation, please contact our Corporate/Commercial and Regulatory experts.

[1] There remains an issue about the effect of section 32(2) of the Electricity Industry Act 2010, which is about the demarcation between the Authority’s and the Commerce Commission’s regulatory responsibilities. The Court requested further submissions on this point.