A BETTER DEAL FOR ELECTRICITY CONSUMERS

Lower prices for consumers should result from the Coalition Government's electricity reform package, the Treasurer and Ministers of Finance and Energy said today.

The Ministers announced an in principle decision to split ECNZ into three SOEs, and for electricity supply companies to be divided into separate line and energy businesses.

"As a result of these reforms, average electricity prices are expected to fall over the next few years," the Ministers said.

The Coalition Government has ruled out privatisation of any of the new SOEs, or Contact Energy.

The reform package is designed to:

- give smaller consumers a choice of power suppliers and lower prices;
- lower electricity costs for business and industry;
- guard against privatisation; and
- be better for the environment.

"This package is all about getting some proper competition and reform in the interests of lower pricing of electricity," the Ministers said.

"These reforms are designed to deliver benefits to consumers, the economy and the environment over the next 20 years."

Work to prepare ECNZ for the split and establishment of the three new SOEs is expected to take until approximately the end of the year. The Government will then take final decisions on whether to proceed with the restructuring, with formal implementation to follow in the first part of 1999.

"Consumers have already seen significant benefits from the Government's reforms introducing competition into the domestic aviation sector and in the retail petrol market," the Ministers said.

ECNZ split
The three new state-owned enterprise (SOE) generators will comprise:

Waikato hydro stations (SOE 1);
Huntly thermal station, Te Awamutu and the Tongariro hydro stations (SOE 2); and
Manapouri and the Waitaki hydro stations (SOE 3).
Their market shares in 2002 are expected to be around 13, 17 and 30 percent respectively with Contact Energy (25 percent) and the private sector (15 percent) making up the balance.

The decision to restructure ECNZ is "in principle", and is subject to consultations with Maori on Treaty issues; certification that the new SOEs will be commercially viable and will compete vigorously; confirmation that market participants accept responsibility for security of supply; and advice on arrangements to address any environmental issues.

Security of supply is likely to be enhanced under the new arrangements. (For more detail see the other media releases and the "Electricity Reform Package" document.)

Line and energy separation
Ownership of the electricity lines businesses is to be split from the competitive activities of electricity retailing and generation.

Electricity supply companies have a choice on how they implement ownership separation. They can either:

- set up a separate trust by 1 April 1999 to own and run whichever business they do not wish to keep; or
- sell whichever business they do not wish to keep by 31 December 2003.

Companies choosing the second option will have to set up separate companies in the meantime and run them as if they had separate owners, including separate boards and management.

"The current level of competition in retailing is very disappointing, and has been shrinking, rather than growing. At present only three per cent of all electricity generated is traded across regional monopoly boundaries. These reforms are designed to kick along the pace of competition and choice for consumers," the Ministers said.

"At present, integrated line and energy businesses have incentives to frustrate the development of competition in retailing by making line access difficult. They can also cross-subsidise competitive activities like retailing and generation from their captive line customers.

"Separation removes incentives to frustrate competition. It parallels the separation of Transpower from ECNZ in 1994 which enabled competition in generation to develop."

Other distribution sector reforms
The package also provides for:
- strengthened and user-friendly information disclosure on prices, costs and efficiency by electricity supply companies, particularly the lines business;
- better published analysis of disclosed information so customers can see how the performance of their electricity supply company compares with others; and
- a requirement that the industry adopt within 12 months low cost arrangements to enable smaller consumers to change retailers. If the industry fails to deliver the Government will introduce a mandatory system.
- The Government also intends to make it much clearer to lines businesses, which don't face competition, that they risk price control if they don't reduce costs and prices.

"This reform package demonstrates that the Government is serious about competition, choice and lower prices in electricity. While the earlier electricity reforms have improved efficiency in the industry they have not benefited smaller consumers," the Ministers said.

"This package will give all electricity consumers a better deal."