Don't Use Reforms As An Excuse Says Bradford

Trust-owned power companies cannot use the electricity reforms as an excuse to increase rural power prices, Enterprise and Commerce Minister Max Bradford said today.

Mr Bradford was responding to Electricity Trust Association Executive Secretary Peter O'Brien, who said the reforms were putting pressure on trust-owned lines companies to stop cross-subsidising 'uneconomic rural lines'.

Mr Bradford said this was not true.

There was nothing in electricity reform legislation that required trusts to behave any differently than they had in the past.

If trusts chose to, they could continue to cross-subsidise rural customers in remote areas, as well as take relatively low rates of return to reflect the desire of their beneficiary owners for lower prices.

"Unless there is a specific requirement in trust deeds, there is no legislative requirement for trusts to now seek rates of return higher than they have received in the past," Mr Bradford said.

"I repeat what I told Parliament last year:

"Domestic and rural customers whose line costs have been averaged, who have faced line tariffs with implicit subsidies, will be able to continue with that if that is what local lines companies owned by the community trust want.

"Any change in rates of return, line tariffs or cross-subsidisation will solely be the decision of trustees and directors and they will have to account to their community for any change," Mr Bradford said.

"For trustees or directors to try and use the new competitive environment, introduced by the electricity reforms, as an excuse is a fabrication of the worst order," he said.

Attached: Letter sent to Mr Peter O'Brien 7th May, 1999.
For further information: Jeremy Kirk, Press Secretary, (04) 471 9836 025-424-565

Mr Peter O'Brien
Executive Secretary
Energy Trusts of New Zealand Inc
4 McCall Place
PAPAKURA

Dear Mr O'Brien

I have before me the transcript of your interview on today's Morning Report in which you state:

"Trustees are obliged by the Trustee Act, and indeed their trust deeds, to act in the best interests of beneficiaries, generally their consumers. The need to be commercial brings conflict, particularly concerning uneconomic rural lines."

I must draw your attention to a number of facts on this matter, and put to you two questions.

As you say, trustees of community trusts must in broad principle act in the best interests of their beneficiaries. Unless there is a specific requirement in their trust deeds, there is no legislative requirement to act in "a commercial manner", for example to seek commercial rates of return which are often (but not always) higher than for trust companies.

The Energy Companies Act 1992 requires trust and local authority-owned companies to operate as successful businesses. The interpretation of this term is however to be decided at the local level. In the interests of their beneficiaries, trust operations in the electricity industry often take relatively low rates of return reflecting the desire of their beneficiary owners for lower prices. Cross-subsidies and relatively low returns have existed for many years. What has happened to change your apparent approach on these issues as outlined in your statement above?

The implication I draw from your reported comments is that trust owned lines companies are about to adjust rural lines prices, as part of acting in a "commercial manner".

What leads you to the conclusion that this is required?

To help your consideration of this issue, I want to draw your attention to a number of statements I made last year, including my third reading speech on the Electricity Industry Reform Bill. They are attached.

Amongst the very clear statement of the Government's position on rural lines pricing - or indeed any tariff setting by lines companies, is this:

"Domestic and rural consumers whose line costs have been averaged, who have faced line tariffs with implicit subsidies, will be able to continue with that if that is what local lines companies owned by the community trusts want. It is entirely proper. What will stand in the way of these monopoly organisations gouging their customers is a regulatory regime to apply to the monopoly parts of the business."

I would like your Association to be very clear on this matter.

The electricity reforms do not require full cost recovery from each sector, each class of customer or each customer within a lines network. If trustees of a lines company wish to cross-subsidize their rural (or other) customers to reflect social or other objectives, the electricity reforms quite clearly allow that to occur.

Cross-subsidy within lines operations has occurred over many years.

The trust deeds for community owned lines companies have not changed since the reforms were introduced to our knowledge, and where they have it has been at the insistence of trustees, not the Government.

Neither the Electricity Act 1992, the Energy Companies Act 1992, nor the Electricity Industry Reform Act 1998 require trust owned (or any) lines companies to increase rates of return (as some have) or to remove cross-subsidies embedded in lines tariffs. Indeed, the Electricity Act 1992 requires electricity companies to maintain the existing network until 2013.

Any changes in rates of return, or lines tariffs, or cross-subsidization, will solely be the decision of trustees and directors. They will have to account for their decisions to their beneficial owners (i.e. electricity consumers in most cases), and cannot use the excuse that the electricity reforms require them to act in the manner you seem to be contemplating.

My questions to you, following your reported comments this morning, are these:

Where in the Electricity Reform Act, or indeed in any other legislation or regulations, is there a requirement for trustees to remove cross-subsidies within lines businesses?

What has changed in trust deeds, or in the decision-making environment of the reforms as compared to pre-reform days, that has led you to conclude that low rates of return by trust-owned companies are unacceptable to the Government?

I would appreciate your response as a matter of urgency.

Hon Max Bradford
Minister for Enterprise and Commerce