Transpower S Operational Review and the TPM

I Trust Matters

Issue 16, June 2017

This informal newsletter for ETNZ members is designed to provide periodic brief updates of issues of current interest to trustees and asset owners.

Transpower’s ‘Operational Review’ and the TPM Transpower’s current consultation on whether or not it should undertake an operational review to improve its existing pricing methodology, now that the Electricity Authority has announced a further delay in advancing its Transmission Pricing Methodology (TPM) revision package, raises the possibility that this might be all that’s needed – i.e. the TPM will not proceed. However, don’t count on it! On face value the “modest and incremental” tweaks outlined in the consultation document fall far short of the major cost allocation shifts and changes in pricing proposed by the EA. Furthermore, Transpower’s operational review has the EA’s support already, indicating that it is not seen as a challenge to the TPM review. However, the consultation opens the door for new proposals that might well outweigh the meagre economic gains identified in the (since discredited) cost-benefit analysis commissioned by the EA to support its TPM package. At this stage all Transpower is proposing are operational changes aimed at:  Loading the costs of decommissioning connection assets (i.e. redundant links with generators, distributors and major users) onto the parties that had been benefitting from those assets, rather than spreading them across the wider customer base;  Loading more of the costs of transmission investments onto the regions benefitting from those investments;  Watering down the current ‘peak use’ focus of the current pricing arrangements in order to remove a supposed incentive for customers to install batteries etc. to reduce peak costs.  ‘De-rating’ upper South Island HVDC charges in order to encourage new generation in the upper South Island. EA’s Consultation on Enabling Mass Participation We’ve got until 11 July to respond to the Electricity Authority’s consultation on enabling mass participation in the electricity market. This is the EA’s first major salvo in its drive to limit distributors’ role to simply providing a ‘platform’ for other parties to use to deliver services such as batteries, solar, demand response functions and other parts of the emerging technologies frontier. A few excerpts:  Distributors and Transpower, as monopoly infrastructure providers, have a privileged position. Distributors in particular have significant control and influence over who uses the network and in what way.  This means that it is no longer necessary for a network business (whether a distributor or Transpower) to own and control the assets that support network reliability. … Network businesses will be able to access a more flexible and

diverse range of resources that can respond quickly to specific requests or to a price signal.  At the distribution level the benefits from introducing competition for network support are likely to be large. Distributors across the country are collectively planning to spend an average of $750 million a year on network assets, each

year from 2016 to 2026. Not all of this spending will be avoidable. For example, it will still be necessary to maintain a lot of the poles and wires. However, if competition in obtaining network support delivered a five per cent reduction in costs it could result in a $375 million cost saving over the same time period.  … a distributor could distort competition by favouring itself or an affiliate when sourcing support to help maintain network reliability. Or a distributor could discourage competition in the retail market by imposing contract terms that shift risk and costs to retailers on its network.  Specifically, the current arrangements around distributors’ involvement in unregulated activities might need strengthening given the prospect of more participants requiring a distribution network service to compete in markets where distributors might also be active.  In New Zealand, a weak form of ring-fencing is used which is referred to as accounting separation. It is employed by the Commerce Commission as part of its role regulating distributors’ revenues. Stronger forms of ‘ring-fencing’ are also used in New Zealand and elsewhere in the world across different sectors, such as telecommunications. These include: a) functional separation which allows distributors to participate in activities

2 outside distribution if they set up affiliates with separate corporate structures and set rules around how resources are shared between them. b) legal separation which would prohibit distributors from directly participating in unregulated markets. Cyber security reminder

The current global rash of malware attacks underlines the need for all parties in the distribution industry, including trusts, to ensure that adequate protections and data back-ups are in place. As a reminder, Members might look at National Cyber Security Office head Paul Ash’s presentation to the May 2016 ETNZ Conference at http://www.etnz.org.nz/Conference+Downloads/2016-+Autumn+Conference+May+Wellington.html

There have been recent reports of cyber intrusions specifically aimed at disrupting electricity systems. On 26 June US electricity utilities confirmed that they were investigating multiple attacks on nuclear generation plants, while earlier this month back-to-back cybersecurity warnings were issued by U.S. officials to grid operators involving twin threats came from Hidden Cobra, the U.S. government's nickname for North Korean government-sponsored hackers, and Electrum, a separate group linked to a new hacking tool, ‘CrashOverride’, designed to disrupt power grids. According to the US Department of Home Security, there is far-reaching campaign of North Korean cyber activity hitting "critical infrastructure sectors" in the United States and globally.

Commerce Commission to be given extra powers On 27 June Commerce Minister Jacqui Dean confirmed the Government is proposing that:  the Commerce Commission be given market studies powers  the Commission’s 'cease-and-desist regime' be repealed  settlements are able to be registered as court-enforceable undertakings According to law firm Bell Gully, potential changes to the misuse of market power regime have been deferred yet again, with officials to report back in mid-2018. This is in stark contrast to Australia, where controversial changes have progressed. Market study regime As highlighted in the media earlier, the most significant amendment is the introduction of a market study regime. This is similar to the power that the Electricity Authority has to investigate anything that falls within its wider brief, giving the Commission the ability to investigate any market. However, unlike the EA, the ComCom can only use this power when the Minister instructs it to do so. It remains to be seen whether or not the ‘understanding’ between the two regulators will result in the Commission steering clear of the electricity market.

3 Changes to the Commerce Act will be required, and – given the heavy information disclosure burden electricity distributors already carry, it would be sensible to lobby for further data requests arising from market studies to be restricted. Repealing the cease-and-desist regime The cease-and-desist regime was introduced as an alternative to the Commission seeking interim injunctions from the High Court but has only been used once since its introduction in 2002, so is being discarded. An enforceable undertakings regime The Government is also proposing that settlements reached between the Commission and parties under investigation be subject to enforcement by the courts. Such undertakings, known as enforceable undertakings, are common in other jurisdictions such as Australia and the US, and would give the Commission greater power to compel compliance with settlement agreements.

Collins, Hansen respond to Commerce Select Committee (Source, Energy News 20 June) On 19 June, Energy and Resources Minister Judith Collins appeared before Parliament’s Commerce Select Committee, and made the following points:  “Over the next 10 years lines companies are going to have to evolve - change - or else their consumers will leave. And that’s exactly what I have seen overseas.”  She is keen to see greater standardisation of equipment and processes so that the country’s 29 distributors can exercise greater joint buying power and can collaborate more on the ground.  She noted she has been “slightly disruptive” in questioning the investments some distributors have made in non-network businesses – such as sock factories and vineyards – but she is wary of requiring amalgamations.  “I think many of us understand the pain that often happens with forced mergers and things like that and I’m not really prepared to go down that track.” Electricity Authority CEO Carl Hansen also appeared before the committee, saying:  He is aware of “quite a lot of activity” among distributors looking for ways to collaborate and reduce their costs.  “It’s going to be essential because with the new technologies coming on board - two-way power flows and a whole range of other things – they are going to have to be able to respond in a much more sophisticated way.”

4  “So it’s quite pleasing that a number of them are actually taking the lead on this. But I couldn’t say it’s all of them at this stage and it’s something I will be talking with some of them about.”