Episode 4: Non-discrimination obligations – level playing field measures

In this episode, Carl speaks to Hayden Glass, General Manager of Wholesale and Supply about the Electricity Authority Te Mana Hiko’s decision to introduce non-discrimination obligations to level the playing field in the wholesale electricity market. Together they discuss what the obligations involve and what they mean for the market and consumers. 

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Transcript

SPEAKER_01 0:09

In each episode, we bring you a conversation with the people that are shaping New Zealand's electricity market. We talk about what's happening, why it matters, and what it means for you. This time we're joined by Hayden Glass, the general manager of wholesale and supply at the Electricity Authority. And Hayden's going to talk us through the level playing field decisions. Kyota Hayden, it's great to have you with us today. Koda, thanks, Carl. It's great to be here. So, Hayden, before we delve deep into the nitty-gritty, could you help orient us into the frame? What are the key challenges that the level playing field works trying to address? How do we think this is going to make a difference?

SPEAKER_00 0:44

Sure. So in our market structure, we have four major generator retailers. So they both generate electricity and then they sell it to customers and to in households. We also have a set of independent retailers who buy their electricity from the mostly from the generator retailers and then try and compete with them in the retail market. So there have been concerns for a very long time that the deals that the gene tailers are essentially doing internally aren't available to these firms who are buying from them at wholesale and competing with them at retail. And so it's that that the level playing field measures are aiming to give some more confidence around, both on the non-price terms to make sure that they can get responses to the IFPs, and also on the price terms to make sure that the prices that they're offered at wholesale are sufficient that there's enough gap to them to compete with the generator retailers at retail.

SPEAKER_01 1:47

This might be a really good point to pause and clarify the terminology. We hear a lot about the level playing field, but we also hear quite a bit about non-discrimination obligations. Could you clarify these two terms for us, Hayden?

SPEAKER_00 1:59

Sure. So the level playing field is the name of the initiative as a whole, and it's a descriptive term of what we're aiming to do here, i.e., we're trying to level up the situation as between the independent participants and the integrated generator retailers. The non-discrimination obligations, those are the tools that we have chosen as a way to level the playing field. It's been a long process, some years, and we have investigated many other options, and we've decided that non-discrimination obligations are the lowest cost and the fastest, most effective way to give more confidence that the uh the independent retailers are able to compete with these integrated firms.

SPEAKER_01 2:39

Perfect. So having cleared the terminology up, let's come to the decisions themselves. What's been decided and how's it going to make a difference?

SPEAKER_00 2:48

Sure. So there's four main decisions here. The first and the biggest headlines are around the non-discrimination obligations themselves. So these are a set of obligations that will be imposed on the generator retailers, just those big four firms, and they'll come into effect from the first of July. They'll start, they discipline the way that the firms uh internally communicate and also make sure that uh any arrangements that they have with their internal arms are also available to firms who are not um who are outside of those four generator retailers. So that's step one. Step two, and that's mostly focused on non-price terms. So that's mostly focused on being able to get a response to your request and being able to have a certain amount of time to consider and respond to that uh RFP response, those kinds of those kinds of matters. The other thing that we're doing is called the RPCA, the retail price consistency assessment. So these are a new requirement. Those are primarily focused on prices. Now, the reason that we're doing that is because the generator retailers have both wholesale and retail prices. The RPCA is designed to test that there's enough gap between the generation that you're selling, the price that you're selling generation at, and the retail price that you're acquiring retail customers at, so that anybody who's equally efficient as your retail arm can make money while competing with you. The third thing is the timetables. So we've got a uh 1 July 2026 is when the obligations begin, and the first reporting is due on the 3rd of September 2026. So quite soon after, and then on a six-monthly rolling cycle will be the um the RPCA reports. So we will start from the electricity authorities' point of view, receiving all this information a little bit later this year, and then we'll be processing it and we'll be making sense of it, and we'll be um publishing analysis of what those things are telling us. Um and the the other piece of the puzzle is just that the firms themselves are also required to have policies to make sure that they can comply with the non-discrimination obligations and the RPCA rules. And uh those re those so they're required to develop internal policies and they're required to audit and report that they are in fact um compliant with these new rules at the at the board level. So to make sure that the firms take it um extremely seriously. So we've looked really carefully at all of the options for intervention and we've uh chosen non-discrimination obligations precisely because we think that they can get uh a direct improvement in the things they were interested in, i.e., confidence that there isn't some sort of sweetheart deal going on at very low cost. We don't expect them to increase the cost for the gene tailors materially, and therefore we don't uh expect any impact on uh retail prices or or for that matter wholesale prices. Uh what has been argued about is uh does it affect the way that firms think about their retail prices because they have to take into account uh all of their downstream competition as well as their internal needs. Um but we uh if a firm uh Gen Taylor were to see the RPCA in particular as causing them to want to put up retail prices, then we would expect them to explain that to us and to document their uh their logic. And it uh because as I say, we don't see why uh this small impost on them, this additional reporting uh in particular, would lead to any material change in their costs. And in a competitive market, you wouldn't expect without a change in costs there to be a change in prices.

SPEAKER_01 6:46

And there's a self-reporting element in this. So um it seems like there's a lot of trust being placed in the gentlers to play ball, to come to the party transparently. How confident is the authority in the openness, transparency that that you'll achieve here?

SPEAKER_00 7:03

So we they will be required to report to us every six months. I think the piece that you're getting at is because the firms are different from each other, the way that they will do this, though they'll demonstrate compliance might vary between the firms. So when we were considering how much a prescription to put into those rules, we decided to be to be quite unprescriptive. That is to say, there's quite a lot of room to move. We're at the principled level in terms of our non-discrimination obligations. What we have said is we will learn and we will learn quickly. And if we discover that uh the rules aren't quite right or that they're leaving too much room, or that people are still concerned that there's uh game playing going on or that the gene tailors are still in a position um to make life difficult in the in the retail market downstream, then we will of course re-look at our rules and and look to tighten up where that is appropriate. Yes, there will. So they are uh once the code change is made, there are a legal requirement on the gen tailors and they'll be enforceable through our usual market mechanisms. But also the government has proposed to increase the powers of the electricity authority and in particular to increase the maximum penalty that can be opposed through the rulings panel process, which is our a kind of our private court system for the electricity uh market. And so from 2027 we would expect that penalties of up to $10 million could be uh levied for a breach. Now that would be a very serious one, uh, but nevertheless it gives a sense of the scale of the importance of um these obligations uh in term in the market.

SPEAKER_01 8:50

And that leads to another big question, and uh there's commentary about this in the public domain about whether the authority should have gone further into forcing that vertical separation between retail and wholesale. What talk to us about that?

SPEAKER_00 9:03

Yeah, so as I said earlier on, we considered all sorts of options earlier in this process, and we gradually uh narrowed the field down to trying to do something A, in non-discrimination, and then B with this extra retail price consistency assessment. So earlier on we did look at uh a couple of um much more interventionist options. One of them is virtual disaggregation, which essentially would uh take control of some of the gene tailers uh generation and mean that they would no longer be able to decide how that effectively got offered, like require them to offer a certain amount of their generation in a particular way. Um and then further, even more interventionist would be um some form of structural separation or a separation of the firms in a different way, separating retail from wholesale is one that's talked about, but there are other possibilities there. Um legally don't have the power to do that. That is such a material change to the system that it would require legislation, and we see some political parties talking about it.

SPEAKER_01 10:06

Hey, and none of this work sits in isolation. So, where does the NDO's initiative and the the broader context of the level playing field, where does that sit in the authorities' portfolio of work?

SPEAKER_00 10:18

Yes, that's right. The level playing field decisions are an important piece of the puzzle, but there are several other decisions that play a supporting role. In particular, we've made decisions recently on market making that will extend the forward curve. At the moment, we have a three-year public view of what prices will do, electricity prices will do. Um, we're proposing to extend that to five years, which will give more certainty for market participants about what prices are coming down the track. Uh, the second thing that we are doing is we are market making what we call the super peak product. And so that provides uh electricity in the peak periods at the beginning and the end of each day. Uh and that so we will have greater confidence that prices for that product will uh are reliable. Uh and we are also looking at long-duration firming. Now, this is the dry year problem, is changing its nature a bit as we have more solar and wind in the network, and the electricity authority will be looking this year at how big is that problem, how is it changing over time, and are there anything that we could do on the market side that would help participants to manage those risks in a lower cost way to the system? So, yeah, there's a there's a whole set of uh of work there that um that hangs together with improving confidence in the market, improving wholesale competition, and ensuring that independent retailers can thrive.

SPEAKER_01 11:48

And hadn't that really connected and sounds really thoroughly thought out with the key decisions at play now. So is the job done? Uh, do you foresee the need to come back and review some of this work and these decisions in future?

SPEAKER_00 12:01

So, as you know, Carl, the rule book is about this high. Um, and so we are always in the process of reviewing. But in specifically in relation to the level playing field, yes, we anticipate uh gathering this information and reporting upon it and making a list of improvements to make. Now they may be big or they might be small, and then we anticipate in a couple of years a full relook at the whole system to basically test did we get it right, but also are the costs that we're imposing showing uh you know, commensurate with the benefits that we are seeing. And uh that will provide an opportunity to test whether those original decisions that we made, basically saying NDOs are a the best first option, were right, or whether we need to take further measures to build confidence around competition in the wholesale market.

SPEAKER_01 12:52

So, with all that's going on, how do consumers most stand to benefit from this work? Sure.

SPEAKER_00 12:58

So the idea here is that we're improving the effectiveness of the electricity market and that that will uh improve competition at retail, and that that will lead to uh great more options for consumers and better pricing over time. This is we're quite a long way from consumers at this point. We're way we're way down the sort of wholesale generation end of things, and we're in the wholesale contracting market, which is a is its whole whole world of hedges and things that consumers are not exposed to. But we anticipate that improving competition in these structural and foundational areas can help over time build the position uh of independent and competitive retailers and bring more uh innovation to market and bring greater confidence and investment from the uh at the retail end where most consumers are.

SPEAKER_01 13:47

Hayden, really appreciate you coming in with us and your time with us today. Thank you so much. Gotta such a pleasure. And really appreciate everyone joining in online. Uh, this is a really fascinating topic. We've probably skimmed the surface of some key areas. So for those of you that would like to find more, there's a lot more information on the authorities website at www.ea.govt.nz. Kakitiano. We'll see you again soon.