Regulating for the Reliability of Electricity Transmission and Distribution Networks

Abstract

European Union member states are increasingly treating reliability of transmission and distribution networks as a key issue in the design of their electricity regulatory regimes. This paper analyses the regulatory regimes in the EU (including the 2003 Electricity Directive - Directive 2003/54/EC - and the 2005 Security of Supply Directive - Directive 2005/89/EC) and four EU member states: the United Kingdom, Ireland, Italy and the Netherlands. Those member states have each adopted a comprehensive package of mechanisms that are designed to improve network reliability. The most useful mechanisms that they have developed are reporting and publication obligations, quality standards that are linked to customer compensation schemes, and reliability incentives that are incorporated into tariff regulation. Those mechanisms have been credited with causing substantial reliability improvements, most notably in Italy. This paper uses the lessons from those EU member states to review and evaluate the New Zealand electricity regime. New Zealand currently only has very limited mechanisms addressing reliability. However, two major reforms are in progress. The Commerce Amendment Bill was introduced in March 2008 and will fundamentally reform the price control regime for electricity operators. The Commerce Commission is also reviewing its current 'thresholds' control regime, which contains the details of how the price control system operates. This paper makes recommendations for both of those reforms. It recommends that if New Zealand is serious about wanting to improve reliability then it should adopt some of the successful European mechanisms. In particular, it should enhance its reporting and publication system, improve the reliability incentives that are contained in the current and proposed price control regimes, and seriously consider introducing a quality standards and customer compensation system.