The Government is considering relaxing the rules that restrain electricity lines companies from generating power.

The 1998 electricity reforms forced power companies to split the lines side of their businesses from generation in an attempt to force more competition.

Since then, Labour has relaxed the rules, allowing lines companies to generate a small amount of power. However, the constraints have led to few companies building generators.

Energy Minister Trevor Mallard said he was looking at options to encourage lines companies to make increased investment in generation, but not a full-scale review of the legislation.

"But it's likely there are a number of things we can do to get better co-ordination between electricity lines and generation operations ... ," he said.

"It's also important that we balance any changes against the risk of lessening competition in the electricity market."

The options included in a discussion document released by the Economic Development Ministry include:

* Removing the requirements for line companies to operate any generation at arms length outside the main company.

* Lifting the amount of power that line companies can generate.

* Allowing lines companies to hedge financial risk linked to their generation capacity.

The discussion document says officials favour allowing lines companies to hedge financial risk, and removing the arms length requirement.

Officials oppose raising the amount companies could generate, saying it would lessen competition and increase the opportunities for cross-subsidy and anti-competitive behaviour.

The discussion document says it is unclear how much new investment in generation there would be if the regulation threshold was increased.

"By and large, there is no apparent shortage of project proposals or capital for investment in generation," the document says.

"Rather, the main barriers to generation investment are uncertainty regarding the availability of gas, climate change policies and Resource Management Act difficulties. None of these would be affected by the relaxation of the arms length rules."

The review follows one last year on whether lines companies should be able to trade in electricity hedges.

The discussion document is open for public comment until May 25.

- NZPA