Update on compliance trends and outcomes

The Electricity Authority has a Compliance Strategy to structure our compliance approach for industry participants and focus our resources on priority areas.

Over the last five years, the Authority has completed fact-finding assessments for 613 alleged breaches. This case study looks at the trends in non-compliance by participant type, the severity and most common breaches and case outcomes. It shows the Authority’s approach to continually monitor and enforce compliance, so that industry participants operate on a level playing field and consumers are treated fairly.

This is the first of these types of trend reporting. We will be looking at publishing similar updates on an annual basis.

Trends of alleged breaches

Over the last five years, the Authority has completed fact-finding assessments for 613 alleged breaches of the Electricity Industry Participation Code 2010 (Code) and regulations. This includes:

• Decisions to decline to take further action (formal investigation) for 565 alleged breaches on completion of the initial fact-finding process
• 101 warning letters issued to industry participants (including market operation service providers)
• 48 breach allegations progressed to formal investigations
• 7 referrals to the Rulings Panel for alleged breaches of the Code, of which the Ruling Panel found:
  • Six were breaches of the Code and penalties were imposed eg, pecuniary penalties or public reprimands
  • One resulted in a finding that no breach had occurred.

The Authority assessed the potential market impact of each alleged breach to understand the level of harm related to the non-compliance, using several criteria, such as:

• Actual or potential security of supply, operational or market impacts
• How often the non-compliance occurred previously
• How effective the participant’s processes and controls are
• Whether the non-compliance was inadvertent, careless or deliberate
• A participant’s understanding of the non-compliance and the potential impact of their actions or inaction.

The following table shows the breakdown of the severity of alleged breaches from 2019-24:

^{*The severity resulting from an alleged breach is assessed across the following criteria - competition, reliability, efficiency, domestic and small business consumers interests, and the likelihood of ongoing or recurring non-compliance.}

The table below sets out alleged breaches by participant type, the number of alleged breaches each year (for all Code provisions), and the most common Code clause breached by each participant type.

Alleged breaches by participant type have generally reduced from 2019-24, indicating an improved level of controls and understanding of the Code obligations by participants.

Our approach to compliance

The Electricity Authority’s Compliance Strategy is underpinned by the VADE operating model. VADE stands for Voluntary, Assisted, Directed, Enforced and spans the full spectrum of compliance elements. However, the principle is that most people want to, and try to comply, and that enforcement (such as referring cases to the Rulings Panel) acts as an incentive for voluntary compliance.

The VADE model allows the Authority to exercise discretion and ensures that any compliance intervention is commensurate with the level of non-compliance. The VADE model below sets out some of the interventions and regulatory tools available to the Authority.

Compliance means meeting or exceeding the requirements of the regulatory framework. Voluntary compliance means that participants are choosing to comply. We seek the highest possible levels of voluntary compliance.

To identify compliance patterns, we draw together and use all the information sources legally available to us, including:

• Participant audits
• Education
• Monitoring
• Investigation
• Enforcement.

We strive to continually improve outcomes by working with participants and industry bodies to promote a voluntary compliance culture across the electricity industry.

Our compliance monitoring focuses on the highest-priority risks. By risk we mean two things:

• The magnitude of the consequences that would eventuate should an event occur; and
• The likelihood of that event occurring.

Participants are required to comply with their obligations under the Code, Electricity Industry Act 2010 (Act), and regulations made under the Act.

Regulations 7 and 8 of the Electricity Industry (Enforcement) Regulations (Regulations) require mandatory reporting of alleged breaches of the Code:

• Under regulation 7, an industry participant who believes on reasonable grounds that it or another industry participant has breached a provision of Parts 7, 8, 9 or 13 of the Code about common quality or security, or a related provision in Part 17 of the Code, must report the alleged breach to the Authority as soon as practicable after becoming aware of it.
• Under regulation 8, an industry participant who believes on reasonable grounds that another participant has breached the Code must report the alleged breach to the Authority as soon as possible.

If you aren't an industry participant, you can still report an alleged breach of the Act, the Regulations or the Code to us. About reporting a breach.

There is a high level of voluntary compliance within the sector, however barriers such as a lack of awareness, understanding, or capability may prevent some participants from operating in a compliant manner. There is also a risk that some participants’ efforts to ensure compliance is proportionate to their perceived risk of non-compliance.

Risk framework

We proactively monitor compliance of eight areas of the Code, by considering both the level of harm from non-compliance and the likelihood of undetected non-compliance occurring if there is no monitoring.

The eight highest priority compliance areas are:

1. Trading conduct
2. Reasonable and prudent system operator requirements
3. Automated under frequency load shedding (AUFLS) readiness
4. Wholesale market information disclosure
5. Risk management contract information disclosure
6. Provision of internal transfer price information
7. Distributor arm’s length requirements
8. Grid emergency planning.

The following table summarises our monitoring of the high-priority areas since 2022:

Summary and next steps

The Electricity Authority is seeing a downward trend in reported breaches and will continue to report on trends each year.

We are working hard to improve understanding and awareness of participants’ obligations. We publish industry guidelines, case studies and run an industry training programme.

We are here to support and advise and welcome any queries to compliance@ea.govt.nz