13 August 2004

Hon Pete Hodgson:

Second reading, Electricity and Gas Industries Bill 2003

I move that the Electricity and Gas Industries Bill be now read a second time.

This bill is a further milestone in providing New Zealand with energy in an efficient, fair, reliable and environmentally sustainable manner in the post-Maui environment.

The bill contains measures to promote security of supply, consumer protection, competition, and to improve the governance of the electricity and gas industries. It updates the Electricity Act 1992 to take account of the establishment of the Electricity Commission.

Electricity security of supply is clearly essential to New Zealand and New Zealanders. The bill provides an enhanced toolbox of powers for ensuring security of electricity supply, including enabling the Electricity Commission to contract for reserve energy supplies for very dry years. Additional regulation-making powers are provided for use if required, covering consumer protection, promotion of retail competition, improved information for market participants, and development of distributed generation.

Regulation-making powers are also provided under the Crown Minerals Act to allow better disclosure of information relating to gas and oil reserves.

The bill also amends the Commerce Act to clarify the interface between the functions and powers of the Commerce Commission and the Electricity Commission in relation to control of electricity distribution companies.

The Electricity and Gas Industries Bill was referred to the Commerce Committee who heard submissions from a wide range of interested parties. I commend the Committee for the excellent work it has done in refining this Bill and support its recommendations.

I want to take this opportunity to discuss a number of improvements made by the Committee.

In relation to the gas sector, the bill now provides for the establishment of an approved industry body to co-regulate the gas industry while retaining backstop powers to establish an Energy Commission if the industry body is not successful.

A co-regulatory approach was proposed by the Gas Industry Steering Group made up of representatives from the upstream and downstream gas industry and gas consumers, and has been designed in consultation with, and with the support of, the industry.

The co-regulatory model has been developed to ensure that the incentives on the industry are aligned with the outcomes the Government seeks and that the governance arrangements are constitutionally sound.

The Bill also amends the Electricity Industry Reform Act to allow electricity lines companies to own any type of generation equivalent to the higher of 50 MW or 20% of their network load. They are of course already able to own unlimited amounts of new renewable generation.

Electricity lines companies asked that the provisions in the Electricity Industry Reform Act 1998 that restrict the ability of lines companies to invest in generation and retail be repealed.

While the lines companies made some valid points, the Government believes that risks may still exist with allowing lines companies back into generation and retail. A major change of this nature to the current industry structure would not be appropriate without full consideration and consultation on the issues involved.

For this reason, instead of repealing the provisions outright, the government members decided a further easing of the limits on how much lines companies can generate is more appropriate.

A number of important provisions are also included in the Bill to ensure good governance and process.

The Electricity Commission will be required to assess alternatives, costs and benefits prior to making recommendations for regulations or rules. This will increase transparency around the Electricity Commission's decision-making and will reduce uncertainty for the industry.

The Government also expects the Commission to achieve its objectives primarily through information provision and contracting, and to use the regulation-making powers provided in this bill as a last resort.

It is also proposed that the current powers of the Minister under the Electricity Act be curtailed in a number of ways, including removing the Minister's power to direct the Commission, limiting the Minister's ability to amend the Commission's recommendations, and precluding the Minister from promulgating regulations unless the Commission has first made a recommendation.

The Select Committee has also amended the Bill such that the power to transfer jurisdiction for lines targeted price control regime from the Commerce Commission to the Electricity Commission has been delayed until 31 March 2009. This change acknowledges the views of many submitters to the Select Committee who validly suggested that the any change in regulatory jurisdiction for large electricity lines companies, other than Transpower, should be further deferred to maintain continuity and the integrity of the price control and other assessment processes already initiated by the Commerce Commission.

A further important improvement made by the Commerce Committee is to strengthen the mandate for the Electricity Commission to promote energy efficiency by allowing the Commission to fund programmes relating to cost-effective energy efficiency and conservation. This is important for allowing more effective promotion of energy efficiency and demand-side management.

The Committee has also made explicit provision for Transpower to contract for generation to manage grid reliability. This is important for situations where it may be more cost effective to generate closer to demand than to up-grade the transmission lines.

The electricity and gas sectors are critical to New Zealand's economic growth. We face continuing challenges to ensure security of supply in both sectors at the best possible prices. These include the depletion of the Maui gas field, our vulnerability to dry hydro years and growth in demand for electricity. At the same time we aim to make continuing progress towards a sustainable energy future. This Bill is a key part of the Government's response to these challenges.

The Government will clearly set out its objectives for the electricity industry in the Government Policy Statement, which will be released following the passing of this bill. The Government Policy Statement will continue to invite the industry to use co-operative means to deliver on these results so that the Electricity Commission will only need to use its regulation-making powers as a last resort.

ENDS

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