Submission on ‘Standardisation

Submission on ‘Standardisation:

Model Use-of-System Agreements and

Proposed Code Amendments’

Unison Networks Limited

8 September 2011

STANDARDISATION: MODEL USE-OF-

SYSTEM AGREEMENTS AND

PROPOSED CODE AMENDMENTS

8 September 2011 Page 2 of 22

TABLE OF CONTENTS

1 INTRODUCTORY COMMENTS ........................................................................ 3

2 CHANGES TO THE CONSULTATION APPROACHES ADOPTED BY

DISTRIBUTORS MAKING TARIFF STRUCTURE CHANGES .............................. 4

2.1 Authority‟s proposal .......................................................................... 4

2.2 Unison‟s response ............................................................................. 4

3 CHANGES TO THE ARRANGEMENTS FOR THE EXCHANGE OF INFORMATION

ABOUT CHANGES TO DISTRIBUTION TARIFFS ............................................. 4



4 CHANGES TO THE NOTIFICATION PERIOD AND APPROACH ADOPTED BY

DISTRIBUTORS MAKING TARIFF RATE CHANGES ........................................ 6



5 CHANGES TO THE FRAMEWORK AND APPROACH TO NEGOTIATING USE-OF-

SYSTEM AGREEMENTS ................................................................................. 6



6 STANDARDISATION OF PRUDENTIAL SECURITY REQUIREMENTS ............... 7



6.2.1 Efficient level of prudential requirements ............................................. 8

6.2.2 Lack of evidence that current approach is causing significant problems . 10

6.2.3 Is it appropriate to socialise the cost of some retailers‟ default risk ....... 10

6.2.4 Authority under estimates costs of inefficient risk management ............ 11

6.2.5 Ensuring distributors are compensated for retailer default ................... 12

6.2.6 Recommendations .......................................................................... 13

7 STANDARDISATION OF ICP-PRICED NETWORKS’ RECONCILIATION

APPROACHES............................................................................................. 14

7.1 Authority‟s proposal ........................................................................ 14

7.2 Unison‟s response ........................................................................... 15

8 PROPOSED CHANGES IN RELATION TO RETAILER’S CONSUMER

GUARANTEES ACT LIABILITY .................................................................... 15

8.1 Authority‟s proposal ........................................................................ 15

8.2 Unison‟s response ........................................................................... 16

9 APPENDIX 1 .............................................................................................. 17

10 APPENDIX 2 .............................................................................................. 22





1 INTRODUCTORY COMMENTS

1. Unison welcomes this opportunity to submit on the Electricity Authority‟s

(Authority) Consultation Paper: Standardisation: Model Use-of-System

Agreements and Proposed Code Amendments.

2. In the following sections we provide detailed comments on the Authority‟s

proposals. Responses to the Authority‟s specific questions are detailed in

Appendix 1.

3. It is our understanding that the Authority‟s proposal for a number of its Code

amendments is based on its reasoning that a market failure exists. This is

formulated on an assumption that there is an imbalance of negotiating power,

such that distributors can simply dictate the terms of arrangements. Unison

submits the perception of imbalance, is not itself a market failure, but only where

arrangements lead to an inefficient allocation of risk or undue (transaction) costs

imposed on retailers is there a market failure.

4. Where the proposed Code amendments impose significant additional costs on

distributors, they will be compelled to manage their additional risk exposure in

other, less efficient ways. Distributors operate in a commercial environment, and

therefore will not simply accept additional risk and internalise the resulting cost

implications. However, there is no definitive proposal on how non-exempt

distributors will be able to recover these costs in their prices. The cost pass-

through mechanism under the default price-quality path (DPP) could be a way to

account for code amendment costs, but requires an explicit decision by the

Commerce Commission (Commission).

5. Unison submitted on the nature of Authority‟s analysis framework in June1. We

continue to remain concerned that the Authority has not given appropriate weight

to how particular Code changes will fundamentally impact on risks and business

processes. Such proposals will impact on distributor and retailer behaviours, and

need to be taken into account in any cost-benefit analysis.

6. Unison has read and supports the Electricity Networks Association‟s (ENA)

submission.

1 Unison’s submission: Submission on more Standardisation of Distribution Arrangements, paragraphs 8-19,22

June 2011.





2 CHANGES TO THE CONSULTATION APPROACHES ADOPTED BY

DISTRIBUTORS MAKING TARIFF STRUCTURE CHANGES

2.1 Authority’s proposal

7. The Authority proposes an amendment to the Code to require distributors to

consult with retailers before the distributor makes a change to its tariff structure

that will materially affect traders or consumers. In addition, the Authority will

provide voluntary guidelines to assist in complying with the requirement.

2.2 Unison’s response

8. Unison believes it to be good practice for distributors to consult with retailers

before making tariff structure changes. Unison already complies with this

requirement, and the requirements to give retailers 60 days notice of price

changes.

9. We note that the Consultation Paper also discusses whether consultation should

apply to „change in price only2‟. Unison strongly objects to the extension of the

consultation requirement to „change in price only‟. A „change in price only‟, has

much less of an impact on retail systems and processes than the current intended

scope of the proposed Code amendment in 12A.8, which refers only to changes to

„tariff structures‟. The two month Notice period for price changes is sufficient for

retailers to factor this into their own prices.

10. Unison recommends that the Authority:

(i) notes the support for distributor consultation with retailers before a material

change to tariff structures; but

(ii) delay the Code amendment until the voluntary guidelines have been

consulted upon and drafted; and

(iii) does not extend the consultation requirement to „change in price only‟.

3 CHANGES TO THE ARRANGEMENTS FOR THE EXCHANGE OF

INFORMATION ABOUT CHANGES TO DISTRIBUTION TARIFFS


11. The Authority has proposed that the use of EIEP12 will be mandated by the Code

in respect to mass market customer tariffs (i.e., those ICPs with category 1 or 2

metering installations).

12. However, the Authority is proposing to incorporate a Standard Tariff Codes

document into the Code, and therefore is consulting on whether distributors

2 Electricity Authority’s Consultation Paper Standardisation: Model use-of-system agreements and proposed

Code amendments; paragraph 4.2.8.





should be required to use standard tariff codes when using EIEP12 for

transmitting distributor tariff code information to retailers.

13. The Authority considers that the concerns raised around tariff code

standardisation are specific examples of potential issues with implementing the

proposal in practice, rather than fundamental problems with the principle.

14. The Authority acknowledges that the Standing Data Formats Group (SDFG) is

progressing development of register content codes, and is of the view that

register codes and tariff codes should be the same.


15. Unison supports initiatives to standardise the way information is exchanged

between distributors and retailers, and does not consider that mandating the use

of EIEP12 in the Code is an onerous requirement. However, as previously

submitted, Unison disagrees that it will provide any material cost saving to

retailers, since there is significant information that accompanies the basic tariff

information that is provided to retailers.

16. Unison does have concerns in respect to the proposed mandating of standardised

tariff codes. Pricing is fundamental to our business, and it is essential that a

distributor can retain the ability to deliver the pricing structure that best meets

customers in their area, and reflects the particular characteristics of their

network. Unison is concerned tariff development and innovation could be stifled

by the mandated requirement to use specified standard tariff codes.

17. Unison acknowledges that there are a number of administrative issues that could

be resolved, thus reducing transaction costs for both retailers and distributors.

We consider that the industry is progressing on such issues, in the form of the

SDFG working group. However, care needs to taken that the drive to reduce

transaction costs, does not come at the expense of a distributor‟s ability to set

their tariffs, and change those tariffs overtime. Such capability is especially

important with the electricity market entering into a dynamic phase where smart

devices will enable much better price signalling. The cost-benefit analysis for

mandating the use of EIEP12 and standard tariff codes does not appear to take

into account the advancement in smart technology and the cost impact of

reducing the distributor‟s ability to set tariffs.

18. Although the Authority has stated it will be issuing further guidance regarding the

process to add new tariff codes, without such detail we are concerned the process

may place restrictions on distributors trying to introduce a new tariff, and how it

fits within a code format. If the Authority progresses with the proposal of tariff

code standardisation, the Code needs to explicitly provide that the Authority will

update the Standard Tariffs Codes Document on a regular basis with all new tariff

codes notified to it by distributors. Such an amendment would allow distributors

to retain the required flexibility to exercise their commercial judgement when

setting tariffs, thus achieving long term business objectives that benefit both the

consumer and the business within the regulatory framework.






(i) notes that Unison supports the use of EIEP12; but

(ii) does not support the proposed mandatory tariff code standardisation.

(iii) If the Authority nevertheless wishes to progress tariff code standardisation,

then without prejudice to the above, we support ENA‟s recommendation of

the following modifications to the Authority‟s proposal:

(iv) the Standard Tariffs Code document should be developed in collaboration

with all distributors and retailers;

(v) compliance should initially be voluntary;

(vi) the Standard Tariffs Code document should be regularly updated; and

(vii) new tariff codes will not be subject to approval by the Authority.

4 CHANGES TO THE NOTIFICATION PERIOD AND APPROACH ADOPTED BY

DISTRIBUTORS MAKING TARIFF RATE CHANGES


20. The Authority proposes to incorporate a two-month notice period in the model

use-of-system agreements (UoSA), rather than the Code, for notifying tariff

changes.


21. As previously submitted, Unison believes the two-month period provides an

appropriate balance between a timely notification to retailers, with acquiring

sufficient information to accurately set tariffs under the Commission‟s DPP

regime.

22. Unison recommends that the Authority note the support for a two-month notice

period for notifying tariff changes.

5 CHANGES TO THE FRAMEWORK AND APPROACH TO NEGOTIATING USE-

OF-SYSTEM AGREEMENTS


23. The Authority proposes to include an obligation in the Code that distributors and

retailers negotiate the terms of their UoSA in good faith, and mediation is

proposed where the parties are unlikely to agree on the terms.


24. Although Unison is comfortable with the proposal that distributors and retailers

negotiate the terms of their UoSA in good faith, we are apprehensive about the

adoption of mediation as an obligation. As previously submitted, a mandatory

mediation process may entice retailers to adopt more extreme negotiating

positions, which they then seek to obtain through mediation.





25. The Consultation Paper does not expand upon the proposal in the May paper

which provided that there would only be a benefit of 1 to 10c per customer per

year. Unison disagrees that such a small benefit justifies the mandating of

mediation where terms can not be agreed upon. Unless there is further evidence,

of retailers generally experiencing negotiation problems with distributors, the

inclusion of the requirement to negotiate in good faith should be sufficient to

ensure the entrance of retailers on to networks.

26. However, if the Authority proceeds with the inclusion of mediation in the Code,

we support the ENA‟s recommendation that the mediation provisions in the Code

should include:

- A requirement for a minimum period (e.g., Unison considers 3 months is a

reasonable period) of negotiation prior to either party being able to trigger

the mediation provisions;

- Clarification that only the Rulings Panel may make decisions on the

appointment of the mediator; and

- The parties to the mediation must bear the costs of the mediator in equal

proportions.


(i) note that Unison is comfortable with the proposed requirement that

distributors and retailers negotiate the terms of their UoSA in good faith;

but

(ii) recommend the removal of the mediation requirement; and if this

recommendation is not adopted

(iii) require that the mediation provisions of the Code provide for parties to have

firstly attempted to negotiate in good faith over a reasonable time period,

and appointment of the mediator by the impartial Rulings Panel.

6 STANDARDISATION OF PRUDENTIAL SECURITY REQUIREMENTS


28. In the May Consultation Paper, the Authority proposed a reduction to prudential

requirements from the current two months of line charges or a BBB credit rating

in the model use of systems agreement to a BBB- credit rating or two weeks of

line charges.

29. The Authority now proposes an additional alternative option by the Code, that a

distributor can specify in its UoSA a maximum of 2 months‟ worth of line function

charges, but with the requirement that the distributor pay the retailer a financing

charge equal to a 15% margin above the 90 day bank bill rate on any cash bond

or third party security required in excess of 2 weeks.





30. The Authority reasons that there has been a market failure, through the

imbalance of negotiating power between distributors and retailers, resulting in the

ability of distributors to require prudential security in excess of the levels that

would be achieved if there were competition for the delivery of line function

services. In the Authority‟s view, reducing the prudential requirements will

reduce barriers to retail competition and thus lower prices.


31. Unison is concerned how the Authority is focusing only on one element of how

distributors manage retailer default risk. We note that the current approach of

two-months of prudential requirements for those retailers not achieving a

particular credit rating provides distributors some protection, but it certainly does

not eliminate the risks of retailer default.

32. Unison recommends that the Authority examines the actions of distributors in

situations of default to gain a more accurate assessment of default risk before

reducing the level of prudential security. Under Unison‟s current billing process,

retailers are billed one month in arrears, with payment due on 20th of month.

Therefore there is potentially 50 days of line charges before it may become

evident to the distributor that there is a possibility of default. With the current

prudential requirements, there would then be 10 days grace for the retailer to

access funding before a distributor would be inclined to commence disconnecting

or limiting loads of consumers of defaulting retailers in order to induce switching,

and therefore resumption of billable line charges.

33. If the Authority was to go ahead with its proposal of reducing the prudential

requirements, distributors will be compelled to manage their additional risk

exposure in other, less efficient ways. These alternative ways, such as

monitoring of retailer solvency, will have cost implications that need to be taken

into account in any cost benefit analysis. Distributors will not simply accept any

additional risk from retailers they perceive to be high risk. The proposal could

result in distributors not offering high risk new entrant retailers a UoSA, therefore

actually creating barriers to retail competition.

6.2.1 Efficient level of prudential requirements

34. In that context, Unison disagrees with the Authority‟s assumption that a market

failure exists. The Authority‟s assumption is based on their perception that

distributors have more bargaining power than retailers when negotiating UoSAs;

illustrated by distributors allocating the majority of the retailer default risk to the

retailer. Unison disputes that this indicates a market failure. Instead it is an

allocation of the risk to the party that can more appropriately manage such a risk.

35. As a consequence of market failure, in the Authority‟s view, distributors do not

face market incentives to set prudential requirements at an efficient level:

if distributors were competing in a highly competitive market, any distributor

that required prudential security significantly greater than a level that





properly reflected its risks would likely lose business to distributors who set

their prudential security requirements at a more appropriate level.

36. The Authority substantiates this assertion that prudential requirements are an

inappropriate level, by the reports from a number of retailers that the current

requirements impose a significant constraint on their businesses. At this current

level, these retailers have reported difficulty in obtaining capital or third party

security, unless at a significant funding cost.

37. In Unison‟s view, difficulty in obtaining capital or security is not evidence that

distributors are improperly setting their prudential security requirements, but a

market reflection of the risky nature of retailer businesses. It is the workably

competitive market, with risk management tools, credibly assessing and pricing

the risk of retailer default. Under the current prudential approach, the pricing of

default risk is exposed to market risk management tools, whereby funding

providers assess the level of default risk of retailers, thus a more credible and

efficient level of default risk is obtained.

38. There is no dispute that distributors‟ face risk of retailer default, and therefore

prudential requirements need to reflect the costs/risks to distributors of retailer

default. Unlike the retailers, distributors do not have the direct relationship with

the end consumer. Distributors‟ customers are the retailers. In this relationship

the retailers act as agents, collecting distribution and transmission charges from

individuals and businesses consuming electricity. Therefore distributors do not

have control over who the retailers‟ customers are, and how they manage their

hedging and debt exposure. The result is that distributors face exposure to risk,

which they have limited control over. Before the current two-month level of

prudentials would cease to cover ongoing consumption by defaulting retailers‟

consumers. If a retailer defaults, distributors cannot readily limit their ongoing

exposure to credit risk by simply ceasing to supply consumers of the defaulting

retailer. The result is that there could be non-payment for a considerable period

of time before the retailer goes into receivership or liquidation.

39. The Authority assumes that our maximum exposure would be 8 weeks (56 days)

worth of line charges3. Unison disagrees, a significant factor impacting on the

risk of distributors is the timeframes associated with detecting default and

switching consumers to new retailers. For example, there could be a situation

where the payment of distribution charges after a prolonged period of unhedged

high spot prices is the final trigger for default. A distributor could have 50 days

of line charges owing, then even if the default is triggered immediately, it would

likely take more than 6 days to transfer consumers to a new retailer. If a retailer

defaults due to exposure to high spot prices during a cold, dry winter, there is no

guarantee that another retailer will exist with sufficient portfolio headroom to

accept transferring consumers. This is not an unlikely scenario, where due to not







taking out prudent levels of hedge contracts, a number of large end-consumers

and retailers were exposed to high spot market prices earlier this year.

40. In workably competitive markets, the standard that the Authority applies in its

analysis to justify lowering the prudentials, businesses do not continue to supply

consumers in default. However, unlike other workably competitive markets,

distributors can not readily cease supply due to electricity being an essential

service (or refuse to take on new customers). Therefore, the Authority needs to

evaluate the cost and time that it would take in both identifying default, and then

switching consumers to alternate retailers. Prudential requirements set at two

weeks of line charges would cover only a small proportion of the potential time

when a retailer may be in default. Also, once the retailer is in liquidation, there is

no guarantee that a distributor would be paid distribution charges. As an

unsecured creditor, priority creditors would have first claim on any funds. On the

basis that lack of cash flow and low capitalisation cause insolvency, it is very

likely that the distributor would be paid considerably less than amount owed, if

anything.

6.2.2 Lack of evidence that current approach is causing significant problems

41. Unison does not believe its prudential requirements create a barrier to entry onto

our network. We have 11 retailers operating on our Hawke‟s Bay network, and 6

retailers operating on our central region network. We note that some of these

retailers are small new entrant retailers, at least two of which have grown rapidly.

42. It is important that the Authority distinguish submissions that simply seek to

lower the cost for some retailers to do business, at the expense of increasing all

other retailers and consumers‟ costs in the event of default, from a genuine

barrier to entry.

6.2.3 Is it appropriate to socialise the cost of some retailers’ default risk

43. Unison is concerned that the Authority appears to propose that, notwithstanding

the reasonableness of the prudential requirements, retailer competition benefits

justify the socialisation of retailer default risk.

44. The Authority should be extremely careful in their consideration that the

contribution new entrants bring to competition in electricity retailing is so

valuable that it is in consumers‟ long-term interests that that some of their

business costs are socialised in the related electricity distribution market. Such a

proposal is both, inconsistent with the Authority‟s interpretation of its statutory

objective of how to manage situations where it is considering initiatives that have

conflicting effects, and the Authority‟s principle that there needs to be a „clearly

identified efficiency gain or market or regulatory failure‟.

45. Unison supports ENA‟s recommendation that if the Authority wishes to support

retailers without a qualifying credit rating, there needs to be a transparent and

robust approach.





6.2.4 Authority under estimates costs of inefficient risk management

46. The Authority has acknowledged that their proposal will place additional risk on

distributors. However, the Authority appears to assume that distributors will

accept this additional risk. This is an incorrect assumption, taking a very

simplistic approach to the situation. Normally this risk would be managed, by the

servicer provider immediately ceasing supply. However, as this is not a readily

available option, as previously submitted, distributors may seek to mitigate risk

exposure by some or all of the following options4:

1. Increased monitoring of retailers behaviour. Prudential requirements are a

substitute for (costly) monitoring of counter-party finances. Lowering the

level of prudentials increases the extent of monitoring required. For

example, distributors might require regular reporting of retailers‟ hedge

positions to ensure that they are not unduly exposed to high spot prices,

which may become more prevalent under the Commission‟s scarcity pricing

proposals. Monitoring entails a cost, which must be quantified in the cost

benefit analysis.

2. Seeking alternative means of putting barriers in the way of perceived more

risky new entrants.

3. Distributors may also seek to limit their risk exposure to new entrant

retailers by being reluctant to enter into UoSAs with them. If the level of

prudentials is insufficient, and we are unable to manage this risk, Unison

may have to reconsider whether agreements will be offered to retailers who

do meet our requirements. New entrants may therefore find it more difficult

to enter in to the market, not less difficult.

4. Adjusting payment terms to reduce the timeframes for exposure to default.

This would increase transaction costs by increasing the frequency of billing

cycles, or a move to billing in advance. However, such amendments would

reduce the benefits of the proposal, and the associated costs would need to

be considered in the cost benefit analysis. For example, a retailer could

settle with the distributor 2 weekly in arrears.

5. Putting in place arrangements to disconnect or reduce consumption of

consumers of defaulting retailers, leading to inefficient use of electricity.

6. Putting in place different tariff schedules according to the perceived risk

profile of the retailer. This may negate the competition benefits of the

proposal.

47. Additionally, the Authority appears to be assuming that all distributors will be

subject to similar exposure. In our experience, new entrant retailers focus their

efforts on a few network areas (presumably to realise economies of scale in

customer acquisition and management, and to align with wholesale contracts/own

4 Unison’s submission: Submission on more Standardisation of Distribution Arrangements; 22 June 2011





generation). These new entrant retailers can quickly grow to represent a large

share of a network. However, distributors have no ability to influence the degree

to which various retailers‟ trade on their network, and therefore the market share

of the associated default risk derived from these retailers. Accordingly, in reality,

distributor exposure to risky retailers may be much higher on a network by

network basis (i.e., retailers‟ market share is not even across distributors). The

current prudential arrangements enable distributors to mitigate this exposure

which they are unable to influence.

6.2.5 Ensuring distributors are compensated for retailer default

48. As noted above, the current approach of two-months of prudential requirements

provides distributors some protection, but it certainly does not eliminate the risks

of retailer default. By reducing the level of requirements, distributor risk will

increase along with the costs of managing this risk.

49. The Authority‟s proposal assumes that all the costs of the retailer default will be

able to be passed on to consumers. However, there is no explanation in the

Consultation Paper on how this would work for distributors subject to a DPP or

CPP, apart from noting that after discussions with the Commission that two

aspects of the „mechanics‟ of the Commission‟s regime will determine the extent

to which distributors are able to account for the cost of retailer bad debt.

50. Firstly, the Authority asserts that the allowed WACC set by the Commission

assumes distributors will face some level of risk, including the risk of bad debt.

Therefore the distributors who are currently requiring two months‟ prudential

security requirements are largely eliminating their bad debt risk, and could be

considered to be earning returns that are greater than intended.

51. Unison strongly refutes the Authority‟s view that the current WACC estimates

allow for some increase in retailer default, including that this default risk is likely

to be unsystematic. The WACC was set prior to the Authority proposing these

code amendments, and has been used to reset the DPP for non-exempt

distributors for the regulatory period ending March 2015. We also note, that

firms considered by the Commission when establishing the asset beta for the

WACC estimate were largely utilities based in the United States5. The standard

structure of US-based electricity utilities is a large degree of vertical integration

across distribution and retail, and often also generation. In comparison to

distributors in the separated New Zealand market, such utilities would not be

subject to the same degree of risk in respect to retailer default. In most cases,

these large vertically integrated utilities have credit ratings to support their

funding activities, and in addition, in many cases the US regulatory environment

provides a low risk environment for utilities to operate within.

5 Input Methodologies (Electricity Distribution and Gas Pipeline Services) Reasons Paper; Commerce

Commission, December 2010, page 521-523.





52. Secondly, the Authority asserts that the Commission regime can address, on an

ex-ante basis, the effect of retailer default on distributors of it becomes more

endemic and enduring risk in 2 ways6:

(i) Based on the level of bad debts in previous regulatory periods the

Commission could provide for higher distributors‟ operating expenses going

forward; and/or

(ii) Distributors could apply for a customised price path to cover higher levels of

operating expenditure arising from increased bad debts.

53. Unison is concerned by such statements. According to the DPP, if a non-exempt

distributor is subject to retailer default, the distributor is unable to raise their

prices within the regulatory period (3 years for the regulatory period 2012 to

2015, otherwise usually 5 years) to recover these additional default costs.

Provided that the Commission recognises the additional costs, it is in the following

regulatory period, that the price resetting process should allow these costs to be

recovered.

54. Although the Commission has provided a mechanism in the DPP, to take into

account fluctuation in a defined set of „pass-through costs‟ and „recoverable costs‟

at this point in time costs from a code amendment are not prescribed. Such

default costs would need to be explicitly qualified by the Commission as a pass-

through cost under the DPP. We note, that if this does not happen, there is

effectively a wealth transfer, which would be contrary to the Authority‟s code

amendment principles.

55. Although CPP is an option, it is highly unlikely to be an avenue pursued by

distributors, except in the most extreme circumstances. It is a misconception by

the Authority that distributors can simply and relatively inexpensively, apply for a

CPP.

6.2.6 Recommendations


(i) note that prudential requirements are only one aspect of how distributors

manage retailer default risk. Distributors will not simply accept additional

risk exposure, or the resulting costs from managing this risk in less efficient

ways;

(ii) note that although the current prudential requirements allocate most

retailer default risk to the retailer, this is not a market failure, but an

allocation of the risk to the party that can most appropriately manage such

a risk. This allows the workably competitive market with risk management

tools to credibly assess and price the risk of retailer default;







(iii) note unlike workably competitive markets, as electricity is an essential

service, distributors can not readily cease, or refuse, supply of distribution

services. Examination of distributor actions during situations of default

under existing billing processes would show that maximum exposure to

default risk is greater than 8 weeks worth of line charges;

(iv) note that the socialisation of retailer default risk, justified with retailer

competition benefits, is inconsistent with the Authority‟s statutory objective

of how to manage conflicts and principle that there needs to be a clearly

defined efficiency gain or market or regulatory failure;

(v) note that distributors may seek to mitigate risk exposure in a number of

ways, including considering whether agreements will be offered to retailers

who do not meet our credit requirements. Risky new entrants may

therefore find it more difficult to enter into the market, not less difficult;

(vi) note, that the current WACC, set before the proposal, does not allow for the

increase in the level of risk for distributors. Additionally, a non-exempt

distributor, under the DPP will be unable to recover additional default costs

in the current regulatory period;

(vii) does not change the current prudential requirements of BBB or 2 months

prudentials; but, without prejudice to this position, if the Authority decides

to proceed with its proposal,

(viii) expand the “pass-through cost” category by the Commission to include any

residual retail default costs; and

(i) apply ENA‟s submitted recommendation of applying the Australian rules for

prudential requirements, which recognise the wider context of a distributor

managing retailer default risk.

7 STANDARDISATION OF ICP-PRICED NETWORKS’ RECONCILIATION

APPROACHES


57. Following feedback from the May Consultation Paper, the Authority have amended

their position, and are proposing draft Code amendments to require retailers and

distributors to use an “as-billed normalised” methodology, unless both the

distributor and the retailer agree a different methodology.

58. The Authority considers that although “as-billed normalised” will deliver

marginally less positive competition outcomes, there will still be administrative

savings through standardisation, and there will be lower implementation costs as

most participants already have the capability for the methodology.






59. Unison supports the “as-billed normalised” methodology, on the basis that by the

normalising of as-billed data to estimated consumption in each month, a

distributor can be less concerned about the timings of its retailers‟ billing

processes and therefore has greater assurance about cashflows.

60. However, we do not consider “as-billed normalised” should be mandated as the

only approach to how distributors bill their retailers. Each market participant has

invested in systems and processes to cater to existing billing methodologies, and

therefore the Authority is effectively proposing to strand these investments by the

adoption of a single approach. We do not believe the cost benefit analysis

demonstrates that there are significant costs associated with the different

approaches to warrant a code amendment.


(i) note Unison‟s support for the “as-billed normalised” methodology; but

(ii) does not mandate the adoption of only one billing approach for ICP-billed

networks.

8 PROPOSED CHANGES IN RELATION TO RETAILER’S CONSUMER

GUARANTEES ACT LIABILITY


62. The Authority considers that by an imbalance of negotiating power between

retailers and distributors, retailers may be unable to obtain contracts with

distributors that indemnify retailers‟ exposure to liability under the CGA over

which they have no control. Such market failure or inefficiency potentially passes

on suboptimal risks to retailers creating barriers to entry and impeding

competition.

63. The Authority‟s objectives are to:

(i) Allocate risk to the party which can mitigate and manage it most effectively

and at least cost, notwithstanding potential barriers to deriving a return or

mitigating that risk; and

(ii) Achieve an optimum balance between the objectives of improved retail

competition and decreasing the „liability‟ premium included in tariffs.

64. The Authority proposes the addition of provisions in the Code for distributors to

indemnify retailers in respect of retailers‟ liability under the CGA for breaches of

the retailers‟ acceptable quality of supply guarantee, if those breaches are caused

by events or conditions on a distributor‟s network.

65. The Authority considers that for the specifics of distribution UoSAs it is

inappropriate that participants should face general unlimited liability. Therefore

the Authority proposes to amend the liability provisions to provide that the

parties can be liable for all direct losses (not just direct losses that result from





physical damage), and to change the liability caps to an amount equivalent to

50% of the annual lines charges paid by the retailer to the distributor.


66. Unison is concerned that the Authority‟s consultation is not based on a

comprehensive analysis of all the issues that would arise if such an amendment is

made. The focus of the Consultation Paper is solely on the allocation of liability

between the retailer and distributor.

67. As previously submitted to the Ministry of Consumer Affairs7, Unison

acknowledges that the status quo provides an unsatisfactory set of arrangements.

However, we strongly disagreed with the Ministry‟s proposal that electricity

distribution should be treated as a „good‟ under the Consumer Guarantees Act.

Such a proposal would effectively mean that distributors will be required to

provide universal insurance to consumers for the gap between the level of service

a distributor provides with reasonable skill and care and what a consumer expects

as an acceptable quality of service. We note, although the Consumer Law Reform

Bill has not defined electricity distribution as a good under the CGA, the proposed

changes of a tailor made guarantee of acceptable quality that applies to

electricity, and statutory indemnification for retailers, effectively result in the

same outcome of increased liability on distributors, which they would have no

ability to manage under the EA‟s proposals.

68. The Authority‟s proposal to reallocate liability to distributors effectively supports

the avenue the Ministry has followed, without providing the necessary

consideration of the wider issues. In reference to these issues we have appended

Unison‟s submission to the Ministry8.

69. Unison strongly recommends that the Authority initiates a work programme that

addresses the wider issues related to the CGA as applied to electricity. We

support the ENA‟s recommendation that presentation of such a work plan to the

Minister would provide valid reasoning for not amending the Code by 1 November

2011, as it would ensure appropriate focus and consideration of important policy

which has far reaching ramifications for the industry.


(i) note that Unison does not support the proposed reallocation of liability to

distributors;

(ii) initiates a work programme to address the wider issues related to the CGA

as applied to electricity; but without prejudice to this position, if the

Authority decides to proceed with its proposal,

(iii) note the alternative recommendations submitted by ENA if the proposal

proceeds.

7 Submission Unison Response to Ministry of Consumer Affairs’ Additional Paper on Electricity and the

Consumer Guarantees Act; 9 November 2011. 8 Appendix 2.





9 APPENDIX 1 – RESPONSES TO QUESTIONS

Question No.

Question Response

5 Do you agree that the Code should be

amended to require distributors to use

standard tariff codes when using

EIEP12 for transmitting distributor tariff

code information to retailers? If you

don’t agree, please explain why.

Unison supports the use of EISP12,

however does not support the

proposal for mandatory compliance

with standardised tariff codes.

Pricing is fundamental to our

business, and it is essential that a

distributor can retain the ability to

deliver the pricing structure that best

meets customers in their area, and

reflects the special characteristics of

their network. Unison is concerned

tariff development and innovation

could be stifled by the mandated

requirement to use specified standard

tariff codes.

Care needs to taken that the drive to

reduce transaction costs, does not

come at the expense of a distributor‟s

ability to set their tariffs, and change

those tariffs overtime. Such

capability is especially important with

the electricity market entering into a

dynamic phase where smart devices

will enable much better price

signalling. The cost-benefit analysis

for mandating the use of EIEP12 and

standard tariff codes does not appear

to take into account the advancement

in smart technology and the cost

impact of reducing the distributor‟s

ability to set tariffs.





Question No.

Question Response

6 What level of retailer default do you

believe should be considered likely

over the next ten years (i.e. not just the

likelihood of a retailer failure, but the

likelihood that such a failure will result

in unpaid debts to distributors)?

The assessment of retailer default

risk should be conducted by the

workably competitive market, where

there are the appropriate risk

management tools. Under the

current prudential approach, the

pricing of default risk is exposed to

market processes, thus a more

credible and efficient level of default

risk is priced by the market.

7 Do you agree with the analysis

presented that if end-use customers

(i.e. not distributors) were to bear any

cost of retailer default through an

increase in their distribution use-of-

system charges, they would likely gain

net benefits from lower prudential

security requirements through: a)

improved retail competition, and b)

reduced retailer working capital

requirements? If you don’t agree,

please explain why.

Unison does not agree that it is

appropriate to socialise the cost of

some retailers‟ default risk. Such a

proposal is both, inconsistent with

the Authority‟s interpretation of its

statutory objective of how to manage

conflicts, and the Authority‟s principle

that there needs to be a “Clearly

identified efficiency gain or market or

regulatory failure”.

8 Do you agree that distributors who are

not subject to the Commerce

Commission’s default/customised

price-quality regulatory regime do not

face any regulatory constraints on their

ability to pass on any costs of retailer

default to end-use customers through

higher distribution use-of-system

charges? If you don’t agree, please

explain why.

Although exempt distributors do not

face explicit price regulation, they do

face the disciplines of consumer-

ownership and are monitored by the

information disclosure regime.

Also in workably competitive

markets, businesses do not increase

prices when a customer defaults.





Question No.

Question Response

9 Do you have any evidence to suggest

that overseas distribution businesses

enjoy much lower levels of bad debt

than likely levels faced by New Zealand

distribution businesses if prudential

security requirements were restricted to

two weeks?

In respect to overseas, in this context

the market participants are in much

larger markets, and therefore we

believe are likely to have credit

ratings.

It is also notable, that the standard

structure of US-based electricity

utilities is a large degree of vertical

integration across distribution and

retail, and often also generation. In

comparison to distributors in the

separated New Zealand market, such

utilities would not be subject to the

same degree of risk in respect to

retailer default.

In respect to Australia, as illustrated

in the ENA submission, their

regulatory rules allow distributors to

raise their prices to recover the costs

of retailer default.

10 Do you believe that this proposal will

materially address the barrier currently

faced by new-entrant retailers? If not,

please explain why not.

Distributors will be compelled to

manage any additional risk and cost

implications by the Authority‟s

current proposal. See section 6.2.4.

Distributors may seek to mitigate risk

exposure in a number of ways,

including considering whether

agreements will be offered to

retailers who do not meet their credit

requirements. Risky new entrants

may therefore find it more difficult to

enter into the market, not less

difficult.

Therefore, at the very least, the

Authority should not proceed with its

proposal until it has completed the

development of backstop code

provisions for dealing with retailer

default.





Question No.

Question Response

11 Do you believe this proposal will

provide distributors with an appropriate

ability to protect themselves from those

retailers which they perceive to be

particularly high risk? If not, please

explain why not.

No. Proper prudential requirements

are the most cost effective risk

management tool available to

distributors. If the requirements are

reduced, distributors will be required

to manage their risk exposure in

other less efficient ways.

14 Do you believe the draft Code set out in

clause 12A.5 of Part 12A appropriately

achieves the intent of this proposal? If

not, please explain why not.

No. See Unison‟s section on

„prudential requirements‟ contained in

the submission.

16

17

18

Do you agree with the cost-benefit

analysis? Please give reasons.

Do you consider that the costs and

benefits assessed are appropriate?

Please provide details and give

reasons.

Do you have alternative costs or

benefits that should be considered?

Please provide details.

No. See answer to 5.

Refer to ENA‟s submission (paragraph

126 for reasons and 128 for an

alternative way to progress this

issue).

19

20

Do you agree with the use of the as-

billed normalised methodology? Please

give reasons if you do and preferred

alternative and reasons if you do not.

Do you agree with the proposed Code

amendment? Please give reasons if you

do and preferred alternative and

reasons if you do not.

Unison supports the “as-billed

normalised” methodology, but do not

consider “as-billed normalised”

should be mandated as the only

approach to how distributors bill their

retailers.

Each market participant has invested

in systems and processes to cater to

existing billing methodologies, and

therefore the Authority is effectively

proposing to strand these

investments by the adoption of a

single approach. We do not believe

the cost benefit analysis

demonstrates that there are

significant costs associated with the

different approaches to warrant a

code amendment.





Question No.

Question Response

21

22

Do you agree with the Authority’s

analysis that the net benefits of the

proposal will outweigh any potential

costs? If not, please provided

quantitative evidence that can

substantiate your concerns.

Do you agree that the proposed change

should be enshrined in Code, rather

than just being reflected as ‘model’

arrangements? If not, please explain

why not.

No. See Unison‟s section on

„Proposed Changes in Relation to

Retailer‟s Consumer Guarantees Act

Liability‟ contained in the submission.

23 Do you agree that the Code should

remain silent on how disputes about the

distributor indemnity should be

resolved? If not, please explain why

not.

Yes. Unison is not supportive of the

distributor indemnity.





10 APPENDIX 2

Ref: 10/192

E6/15

9 November 2010

Evelyn Cole

Ministry of Consumer Affairs

Consumer Policy

Ministry of Consumer Affairs

PO Box 1473

Wellington

Emailed to [email protected]

Dear Evelyn

Unison response to Ministry of Consumer Affairs’ additional paper on Electricity

and the Consumer Guarantees Act

Overview

Unison welcomes the opportunity to submit on the additional consultation paper on

proposed changes to distributor’s liability for electricity. The Ministry proposes that:

1. “The acceptable quality guarantee that applies to electricity as a good continues as

it provides appropriate remedies for consumers.

2. The lesser responsibility of lines companies under the reasonable skill and care

guarantee is not appropriate.

3. The CGA is amended to remove the distinction between electricity as a good and

as a service, so anyone supplying electricity to a consumer should be supplying it

as a good, and will therefore be subject to the acceptable quality guarantee.

4. Retailers have the benefit of a statutory indemnity from lines companies in respect

of payments made to consumers by retailers under the acceptable quality

guarantee where the breach of acceptable quality was caused by an event on the

lines companies’ networks.

5. Transpower is included in the CGA as a lines company providing services to

consumers for the purposes of an indemnity to retailers for losses from a breach of

the acceptable quality standard caused by an event on its network.

mailto:[email protected]

6. The jurisdiction of the Electricity and Gas Complaints Commission is extended to

include indemnity disputes between retailers and lines companies (including

Transpower) in respect of the CGA guarantee.”

The effect of increasing distributors’ liability for electricity to the level of a “good” is that

distributors will effectively be required to provide universal insurance to consumers for

the gap between the level of service a distributor provides with reasonable skill and care

and what a consumer expects as an acceptable quality of service. There is no free-lunch:

consumers will ultimately have to pay for this universal insurance service or a higher

quality of supply, regardless of whether they want the service or not.

Unison submits that the Ministry must carry out further work to establish quantitatively

the costs and benefits of the proposal against reasonable alternatives, including:

Consumer’s ability to mitigate, self-insure or purchase insurance for events that

arise when the distribution service is provided with reasonable skill and care but

fails to meet an acceptable quality standard (as defined in Contact v Jones);

The service level guarantees and payments provided by networks for outages or

frequency of outages that exceed certain limits under Use of System Agreements;

and/or

Quality requirements that could be set in an internally consistent manner by the

Commerce Commission under the default and customised price-quality path

arrangements under Part 4 of the Commerce Act.

Relevant (relative) costs and benefits must consider:

The impact on quality of supply, relative to consumer willingness to pay;

The costs of any changes in quality of supply;

The expected costs of liability claims; and

Transaction and administration costs (e.g., costs of dispute resolution, impacts on

the EGCC).

Before we address the Ministry’s recommendations, Unison thought it would be useful to

provide background information on the power quality issues arising on electricity

networks. The key point we make is that electricity networks are inherently subject to

faults beyond our control. Unlike manufactured goods, where manufacturers can take

steps to ensure their processes produce consistent, acceptable quality goods, distributors

are subject to significant outside influences that impact on the quality of supply.

Reasonable consumers (as per Contact v Jones1) expect outages and should understand

that it is impossible for distributors to guarantee a fault or defect-free service.

1 Unison notes that the concept of a reasonable consumer, fully acquainted with the nature

of the electricity distribution service, is not unambiguous. For example, from Unison’s

perspective, a reasonable consumer should expect that following a severe storm it may

take a period of days before full restoration of the network, or there may be intermittent faults for some time as a result of latent defects, but would this be unacceptable from a

Power quality defined

Power quality is a general term used to describe the ability of a power system to enable

an electrical load to function properly. The term encompasses not only the maintenance

of a constant electricity supply (reliability and availability), but also the quality of the

voltage waveform and maintenance of system frequency. The relationship between

power quality, reliability and availability is provided in the diagram below2.

FIGURE 1: POWER QUALITY

There are a myriad of ways in which power quality problems can manifest on a power

system and it is only a subset of these problems that are reasonably controllable by a

distribution business. The following table provides a non-exhaustive list of circumstances

that can lead to uncontrollable power quality problems on a distribution network:

consumer perspective? At what point would an extended outage resulting from storm damage change from being an acceptable to unacceptable duration of outage?

2 Diagram adapted from: Brown, Richard E. (2009). Electric Power Distribution Reliability

(2nd ed.), CRC Press, pg 42.

Power Quality

Sags

Swells

Noise

Flicker

FrequencyVariation

Harmonic Distortion

Transients

Reliability

AvailabilityInterruption Duration

Sustained InterruptionFrequency

MomentaryInterruptionFrequency

Interruption to

Supply

Difficulty to control

Wind Storms We frequently observe that airborne broken branches can

be carried many metres from trees onto power lines, even

when they are far outside the (legislated) vegetation

control corridor.

Trees outside the legitimate maintenance corridor can also

affect networks when they break or fall over.

We can only trim trees that are in the falling distance zone

“FDZ” or outside the falling distance zone “OFDZ” if we can

obtain permission from owners for doing so.

Prolonged windstorms can cause lengthy outages as health

and safety concerns prevent the network from being

restored until it is safe for fault people to work on the

network. Even when winds abate, resource constraints

mean that full network restoration can take time as repair

work is prioritised: typically on the basis that faults

affecting the greatest number of customers or sensitive

consumers (e.g., hospitals) are remedied first.

Lightning Surge arresters can largely control lightning damage on

high voltage networks, but installing these in every possible

location would add considerably to the overall cost of

constructing and maintaining electrical networks. This cost

will inevitably flow on to the customer.

High voltage surge arresters are designed to protect high

voltage equipment with high intrinsic insulation strength

rather than sensitive equipment that customers may have.

Low voltage lightning protection has been proven to be

ineffective, so it is not clear why a distributor should be

exposed to an unquantifiable liability for damage caused by

lightening, as opposed to consumers insuring against this in

proportion to the value of their equipment.

Bird Strike Unison installs Bird-B-Gone spikes on poles to deter birds.

We however often find that larger birds (e.g., ducks with

larger wingspans) fly into the conductors at night time

when visibility is low.

Possum Contact Unison makes widespread use of possum guards to keep

possums off our poles, but it has been noted that they can

jump from trees onto HV circuits.

Vandalism Vandalism takes policing to control rather than network

operators. Unison has observed incidents such as copper

theft and vandals breaking locks and operating HV

switches.

Motor Accidents We go to great lengths to keep our equipment out of

harm’s way, but we have to share road corridors with

motorists. There will always be citizens who disregard law

and safety.

Undergrounding largely overcomes the problem, but

underground networks are roughly five times more

expensive to construct.

Underground networks inevitably have switches above

ground level, which remain vulnerable to motor vehicle

accidents.

Damage by Third Party We often record trees felled by independent parties, falling

into lines. Unison has no direct control over people’s

activities on their own properties. We have to rely on

awareness campaigns to inform people about the

associated dangers.

Trucks with high loads and excavators also pose risk to

network security, despite efforts to educate road users.

Voltage Issues How consumers are affected

Motor Starting Motor starting can cause voltage dips due to large inrush

currents in the absence of control circuitry. Utilities are

unable to control the behaviour of consumers after they

have been connected. Even if a breach of the connection

policy can be identified, enforcement poses additional costs

to an electricity lines business (legal and otherwise).

Voltage Unbalance Consumers with poly-phase connections can choose to load

one phase much more than the others. This can lead to

excessive voltage differences between the different phases,

which can damage electrical motors. Circuits can be over-

designed to suit, but would result in higher costs to

consumers.

Voltage Harmonics Distributors go to great lengths to ensure that large, speed

controlled motors do not cause excessive harmonic

distortion at the points of common coupling. Once again, it

is costly to police situations where customers may choose

to not install or abandon filters that need maintenance.

Many emerging technologies in the home have the

propensity to cause harmonics. These include: compact

fluorescent lamps (energy saving lamps), computer power

supplies, heat-pumps etc. As these technologies become

ubiquitous these problems will increase.

Voltage Flicker Consumers that use arc welders (heavy, fluctuating loads)

in residential areas can cause upsetting voltage flicker to

neighbours fed from the same supply.

Upgrading the supply to mitigate the situation is not

economical in most circumstances (and may not even solve

the problem).

To provide an indication of the extent of largely uncontrollable causes of outages on

Unison’s network, the following table sets out the number of network faults per type of

cause over the past two years. These make up around 45% of faults where identification

of an outage cause is possible.

Year

Cause 2009 2010

Grand

Total

Animal/Possum 10 8 18

Bird Strike (Conductor

Span) 8 16 24

Damage by Third Party 19 20 39

Lightning 11 33 44

Motor Accident 39 19 58

Tree Cutter 9 12 21

Tree or Branch FDZ 28 9 37

Tree or Branch OFDZ 2 1 3

Vandalism 3 4 7

Wind 24 47 71

Grand Total 156 177 333

The key conclusion to draw from this information is that there are numerous reasons why

networks are unable to provide a perfect quality of supply. Distributors will seek to apply

best practice asset management techniques to managing availability and qual ity of

supply, but beyond a point there are diminishing returns (in terms of higher quality) from

network investments. It is not axiomatic that increasing liability on distributors will lead

to improved quality of supply, in which case placing the liability on distributors to meet

individual consumer’s costs of unacceptable outages or power quality may simply lead to

a socialisation of such costs. This begs the question of whether distributors are the most

effective party to provide this role, compared to traditional insurance where consumers

can self-select their preferred level of cover in proportion to their exposure to

losses/damage.

Comments on the Consultation Paper

In the following sections we comment on the following issues:

What level of liability should apply to electricity: is it more appropriately

designated as a good or service?

How would liability be determined?

What institutional arrangements should apply to determining issues of quality of

service and the associated costs of providing that quality of service?

Next steps.

Electricity: a good or a service?

As the Ministry identifies, if electricity is designated a good, then it must be provided at

an acceptable standard of quality. Contact v Jones clarifies that the acceptable quality

guarantee is not unqualified: it is an acceptable quality as seen by a reasonable

consumer fully acquainted with the nature of the electricity supply.

The Ministry indicates that under the “good” guarantee as interpreted by Miller. J, the

number of electrical faults that breach the acceptable quality guarantee is likely to fall

(paragraph 53). However, the Ministry considers that under the good guarantee

consumers have recourse to a no-fault recourse against retailers, which the Ministry

proposes to extend to lines companies (paragraph 59).

The Ministry says that it is likely to make it easier for a consumer to prove that the

acceptable quality guarantee has not been met. However, it is clear from Contact v

Jones that there will be a range of circumstances where a consumer will expect outages

and defects in their supplies, and that the test of what the reasonable consumer would

expect would apply on a case-by-case basis (paragraph 31). Accordingly, it is not

apparent that there would be a significant change in the burden on a consumer in

establishing a claim; albeit that there would be a change from proving that their loss has

been caused by lack of reasonable skill and care to prove that their loss is unexpected or

unacceptable (having regard to the nature of the service).

The Ministry discusses that distributors are better placed to manage the risk of network

faults and therefore this would result in distributors making more efficient trade-offs in

their investment decisions. The Ministry also contends that retailers have no ability to

manage the risk of network defects. A number of issues arise:

1. Distributors can only make efficient trade-offs between the price of their service

(including a component to cover their consumer liabilities) and the quality of their

service if they are informed by consumers about the liabilities they are responsible

for covering. Distributors (in general) do not have relationships with their

consumers or information about the nature of the loads at each installation, so are

unable to measure the “benefit” side of providing a higher quality of supply.3 In

many cases, it is more efficient for consumers to take steps to protect their

equipment or to arrange for back-up sources of supply if uninterrupted power

supplies are required. Different consumers have different power quality

requirements: e.g., a consumer may be differentially affected by an extended

outage in winter depending on whether electricity is their sole source of supply or

whether they have access to alternatives (e.g., gas or solid fuel heating).

2. Retailers do have an input into the quality of supply arising on a network.

Retailers are responsible for ensuring that their consumers adhere to the network’s

connection code and therefore need to be liable for faults caused by their

consumers (e.g., a consumer that uses welding equipment can cause network

problems). Retailers also have a responsibility for choosing the metering

equipment at each consumer’s premise. Modern meters have the ability to cost-

effectively communicate information back to the retailer when outages occur and

monitor power quality information. All retailers are currently working through a

process to recertify their aging meters and in most cases are electing to replace

them with smart meters. If these smart meters are appropriately specified, they

could be used to reduce the length of time the retailer takes to notify the

distributor of outages and used to identify when consumers are experiencing

3 All distributors have been required by the Commerce Commission to survey their

consumers on their price-quality preferences. Unison’s residential consumers have

generally indicated (80%) that they would not be willing to pay more for higher quality of service, and we are aware of similar outcomes for other networks (e.g., Vector).

power quality defects (or are causing network problems) before they result in

damage.

Accordingly, distributors who possess little information on the extent of their potential

liabilities are likely to continue with providing quality of service that meets the reasonable

skill and care guarantee (i.e., are not negligent in the provision of their services), rather

than increase quality to meet an unknown liability according to the good guarantee. In

that case, distributors will simply be providing a universal insurance service of uncertain

benefit to consumers.

The alternative to the good guarantee (and the likelihood of costly disputes concerning

what a reasonable consumer would expect) is to accept that electricity has inherent

qualities that mean that a defect-free service cannot be expected by consumers, and

designate it as a service. Consumers would still be able to claim for damage caused

when the distributor fails to provide their service with reasonable skill and care, but

would otherwise obtain insurance to cover situations where electricity does not meet an

acceptable quality. Compared to distributors providing a universal insurance scheme,

this is likely to provide a much more efficient solution. In turn, insurers are likely to take

steps to manage their own costs by investigating the causes of faults. Insurers are well-

positioned to deal with network companies to establish issues of negligence, as this is

already a common practice.

The relative efficiency of the alternatives is illustrated in the following diagram:

Under a “good” guarantee, all consumers will pay through their tariffs an increment “T”

for the distributor to insure consumers for damages caused by the gap between the

service provided by a distributor using reasonable skill and care and acceptable quality.

Because the distributor cannot differentiate (or understand) the potential for liability to

individual consumers it must add a constant increment to its tariffs to cover its estimated

exposure. On average consumers/shareholders may “win” or “lose” depending on

whether the exposure is under-estimated/over-estimated. Under a “service” guarantee,

consumers insure their own exposure to losses incurred as a result of a failure to meet

the acceptable quality guarantee. This would result in benefits to consumer A, who may

have minimal sensitive equipment, or has taken steps to mitigate the risks of

damage/loss – i.e., they do not have to effectively subsidise consumer B. Consumer B

pays a higher insurance premium because they wish to insure more equipment. The key

benefit of this approach is that insurance premium payments are proportional to the

consumers’ own exposure. As noted above, the overall frequency/extent of network

defects is likely to be no different under either good/service designation, as distributors

are likely to continue with asset management practices aimed at meeting reasonable skill

and care service levels.

Overall, for the Ministry to justify its proposals it needs to establish why consumers

should prefer a universal level of insurance to be provided by network businesses. As a

EDB covers

(uncertain) liability

for faults not meeting

“good” guarantee:

estimates average

consumer’s

requirements

Electricity

covered under

good guarantee

Electricity

covered under

service guarantee

Insurance (including

self-insurance)

covers liability for

faults not meeting

“good” guarantee:

consumers insure in

proportion to

exposure

Average

consumer

Consumer

A

Consumer

B

T

IA

IB

general principle, untargeted approaches are not generally seen as net welfare

enhancing.

Determining liability

Without prejudice to Unison’s view that designating electricity distribution as a good is

unlikely to provide net public benefits, if the Ministry continues with its proposals it will

be important that any statutory over-ride does not simply provide that distributors

become automatically liable for all payments that retailers make under the goods

guarantee. As noted above, retailers in fact do have a key role to play in ensuring or

mitigating the consequences of faults arising on the distribution network.

Any statutory changes should provide safeguards for distributors so that they have

reasonable ability to ensure that retailers convey information to consumers on the nature

of the electricity distribution service, and how consumers can mitigate the potential for

losses/damage (e.g., by installing surge protection, power conditioning equipment, back-

up generation). Distributors should also have reasonable ability to require retailers to

ensure that cost-effective solutions are adopted at their consumers’ premises to detect

consumers whose loads are not compliant with network connection standards, provide

outage information on a timely basis and monitor power quality (e.g., through

appropriately specified metering).

Unison currently provides a fixed customer payment when outages or frequency of

outages exceed pre-specified limits. In the event that the Consumer Guarantees Act is

amended to provide increased liability for outages, then a statutory over-ride should

allow distributors to remove such provisions from their use of systems agreements with

retailers to avoid the potential for double compensation of consumers.

Is the Consumer Guarantees Act the right place to determine quality of service

requirements?

The Commerce Commission (“Commission”) regulates the price and quality of supply

provided by distributors. To the extent that regulation of quality of service standards is

deemed appropriate, there is nothing that would prevent the Commission from specifying

an internally consistent set of quality standards and price/quality incentives. The

Commission is the expert body charged with regulating electricity distribution businesses,

and therefore is best placed to determine an appropriate approach to quality that is

internally consistent with its price setting approach. At a minimum, if there is a change

to the liability exposure for distributors arising from a statutory over-ride, then the

legislation should provide that the Commission must take the change into account in

setting price-quality paths for EDBs. This is essential to ensure that distributors receive

reasonable recompense for providing higher quality of service and/or meeting higher cost

of claims if that is a more cost effective outcome.

Concluding comments and next steps

Unison appreciates the additional consultation by the Ministry of Consumer Affairs on the

proposed change in level of guarantee provided by distributors. We are concerned that

the consultation paper is not based on a comprehensive analysis of the issues that would

arise in making the change.

Unison agrees that the status quo provides an unsatisfactory set of arrangements, but

further analysis is required to demonstrate that raising the level of the guarantee would

provide net benefits compared with designating electricity as a service for both retailers

and distributors. Unison has quantitative information from consumer surveys which

demonstrate that they are not willing to pay for improved quality of service (around 80%

of surveyed residential consumers state that they would not be willing to pay any more

for an improved service), and we are aware that other distribution businesses have had

the same response.

We submit that the Ministry needs to assess quantitatively the benefits of its proposals

compared with alternatives, especially taking into account that consumers can, and do

take out insurance, and take steps to mitigate losses. Unison submits that the Ministry

also needs to closely examine the legal implications of the standard, including the costs

of resolving disputes over the expectations of a reasonable consumer taking into account

the causes of power quality issues set out in this submission.

Finally, it is important that any proposed changes to the Consumer Guarantees Act take

account of existing arrangements between distributors and retailers to ensure that there

are not un-intended consequences, particularly where statutory over-rides may apply. It

is critical that any solution ensures that roles and responsibilities can be effectively

allocated between consumers, distributors and retailers to minimise the costs of meeting

whatever guarantee is designated. There are many cost effective steps that consumers

and retailers can take to minimise losses/damages which distributors should not become

liable for.

We would welcome the opportunity to be consulted on the Ministry’s further analysis or

provide further information. I can be contacted on 06 873 9406 or by email:

[email protected]

Yours sincerely

Nathan Strong

General Manager Regulation and Pricing

mailto:[email protected]

Documents

Submission on ‘Standardisation