Count Down to the Reforms

  • Max Bradford
Labour

JAMES COOK CENTRA, WELLINGTON

It has been an interesting year - both politically and within the energy industry.

In December last year I took on the job of Minister of Energy with one over-riding determination: to do whatever necessary to ensure consumers - particularly households and small consumers - get a considerable share of the benefits of a deregulated energy industry.

In the past 12 months that goal has driven every move I have made in the energy portfolio. Behind the scenes, intensive work on a package of further electricity reforms has been underway for some time.

Many of you may have seen the headlines speculating about moves to split ECNZ and to separate line and energy businesses of power companies.

You will have seen or heard a range of opinions from vested interests in the industry - many protecting their own patch, many paying lip service to the ideal of competition but baulking at accepting changes are needed to make it a reality.

Earlier this year, when the Government said it was going to look at further reform in generation, the distribution sector applauded. This seems to have turned to dismay when we said we also intended to review the distribution sector.

On the other hand if you listened to ECNZ in the past few months, you could well believe that generation should remain untouched while the power companies were reformed.

And, behind the loud voices of the vested interests, you will also have heard an ongoing refrain of dissatisfaction from domestic consumers who have not seen much in the way of benefits from the electricity reforms so far.

That is about to be rectified.

Today, we are in the final count-down period to announcements about further electricity reforms designed to bring benefits to all consumers, and crucially to the domestic consumer.

The reforms will signal a move into a new environment where farsighted, enlightened companies which take the interests of their customers at heart will be the ones who succeed.

Consumers deserve a better break in terms of choice and control over their power bills. Only effective competition will achieve that, and we do not have effective competition as yet.

We also have to reduce the costs of producing and distributing energy in general, and electricity in particular, to enhance the competitiveness of New Zealand exporters and business.

Finally, we have to get it right this time. I don't mean for a moment to undervalue the achievements that have taken place in the industry since the reforms began over ten years ago.

However, the challenge now is to find solutions that are effective, lasting, and create the right incentives to stakeholders in the sector: consumers, investors, and management.

Put simply, there are two main ingredients needed to give consumers a better break.

The first is at the Government's end of the electricity industry - to ensure low cost generation and national transmission, and security of supply.

In transmission, we recently introduced a new Statement of Corporate Intent for Trans Power emphasising the priority of efficiency and lowest costs over commercial objectives. In other words, the Government is prepared to take a hit on its books in the interests of the economy as a whole.

When we announce the reform package, I expect it will include details of a further split of ECNZ into a number of competing generators. In this way, we will remove any suspicion or realtiy of monoploy rents being taken by state-owned generators.

This will also remove ECNZ's current dominance of the market and lead to lower prices for consumers, provided it is accompanied by other reforms elsewhere in the electricity market.

There is no point in increasing efficiency in transmission and increasing competition at the generation end of the market if all we do is ``move'' something like a billion dollars in asset value further down the chain to see it disappear into the balance sheets of retail energy companies.

That is where the second ingredient to give consumers a better break comes from - the retail and distribution end of the electricity market.

In the last two years competition within and between retail power company regional areas has shrunk. The latest information is that in the last two years sales of energy reconciled through the market by other electricity companies or traders has fallen rather than increased - from an already totally inadequate 5 percent to just over 3 percent. This is not effective competition

There are problems with access to lines and network facilities for competing retailers. I hear far too many stories about difficulties with access ranging from extra charges being imposed to long delays in negotiations. I understand one company charges $200 per month per site data reconciliation, $70 per month per meter reconciliation and $900 per year meter rental. This is not effective competition

Furthermore, many power companies still only offer conveyancing agreements to new entrant retailers so that the customer ends up receiving two bills; one from the lines business and one from the new entrant retailer. This is not providing the consumer with effective competition

In addition, it is very difficult to prove or disprove cross-subsidies between line businesses and energy retailing. But, given vertical integration and the incentives that exist to deter competition, it would be surprising if some cross-subsidisation did not occur.

So what can we do to get rid of these problems and give consumers real choice and control over their power bills?

There is a menu of options, and the reform package will include a selection of them.

Enhanced information disclosure:

The Ministry of Commerce's new information disclosure proposals are waiting in the wings and are ready to go

However, I am sceptical about the ability of the current information disclosure regime alone to do its job and a beefed up regime would not remove this scepticism entirely. Because of ``creative accounting'', and the after-the-event nature of the disclosures, I fear consumers will always be behind the play

Structural reform:

One likely option is to separate the lines business of electricity companies from the contestable business, that is the energy business (and also generation)

This would work against cross-subsidies between activities and would also promote access across networks

We already require full accounting separation of lines and energy as if they were separate businesses (but I have to say my scepticism about ``creative accounting'' makes me wonder how effective this requirement is)

Corporate separation goes a step further in putting arrangements in place that make separation more of a reality.

Predictably, that prospect has met considerable, but not universal opposition from the electricity suppliers. It has also caused many to review their earlier opposition to other measures - for example, information disclosure - in the hope that they can avert separation.

However, I am looking longer term that that, and am fully aware that at some point political pressure and threats are going to lose clout.

I was also interested to see an Ernst and Young report conclude the separation of line and energy businesses into separate companies will not necessarily lead to significant increased costs in the short term, and in any event such cost increases are easily outweighed by the benefits of future restructuring.

The report found no clear evidence that standalone retailers and line businesses were more costly to run than bundled businesses.

Separation would lead to mergers of small companies, with estimated savings in the order of just under 8% of the average delivered electricity price.

The report concluded it was likely these savings would be passed on to consumers.

The separation of Trans Power from ECNZ was a perfect example of the separation of a non-contestable business from a contestable one. I have never heard any criticism suggesting this separation was a mistake.

Price control:

As most of you know the threat of price control has always been part of our regulatory regime. As Minister of Energy I have the statutory authority under the Commerce Act to initiate price control in the energy sector - either targeted or across the board.

Even though possible price control has been part of our light-handed regulatory regime it has not yet been used. But it is important to note that other countries with deregulated electricity sectors, have all applied price control to the non-contestable parts of the business - that is lines - and to energy retailing for smaller consumers pending competition.

Unless consumers get the break they want, the pressure from the public for the Government to "do something" about price control will be increasingly strong. That is something we can not ignore.

Profiling and half-hourly metering:

The issue of data measurement and reconciliation is critical in the development of competition for household electricity consumers.

Residents must be able to choose and change between whatever energy trader is offering the best deal

An NZIER report which I released for discussion recently, suggests profiling is a useful first step towards the ultimate goal of every household in the country equipped with a hi-tech meter which allows them to switch suppliers at will and which measures their power use in half hourly blocks.

There are sceptics who say high-tech meters are too expensive to be viable for homes, but I challenge those people to look at the rapid changes in any technological industry over the past few years.

Mobile phones get smaller and smarter and cheaper by the day. A phone that used to cost $1200 now costs $40 dollars, sends faxes and emails, and fits easily into a back pocket.

There is no earthly reason why the same progress will not apply to meters which will also combine with PC, remote banking and bill paying, home security, shopping services and appliance automation.

The report by the NZIER makes the following key points:

profiling and half hourly metering can develop simultaneously
the cost of half hourly metering could reduce significantly when large numbers of small consumers start to use it. Furthermore its additional benefits would help off-set the costs.
the annual costs of profiling and metering introduced on a wide scale are likely to be around $10 and $40 respectively at the lowest estimate, compared with a gross margin in retailing of around $120 per small customer per annum.
Profiling and hi-tech metering are both being considered in the context of the electricity reform package.

Conclusion

The reforms to date have only in part produced the outcomes that the Government is looking for. While wholesale prices have come down, average delivered energy prices haven't. Furthermore, wholesale prices could fall much further with further generation reform We need to get it right this time. We can't keep tinkering year by year. I intend that, this time, a package will be introduced that will produce the results that the Government and all electricity consumers wish to see. Generation reform is only half of the story. We need robust competition in retailing and sound regulation in distribution to ensure those outcomes I make no apology about regulation - it is inevitable because distribution is a near natural monopoly. I want to see effective competitionin the electricity sector as a whole so households get a break; and so the sector can play its part in helping reduce costs to our industries so they can compete internationally and continue to provide export earnings and jobs. We have all benefited from competition in airlines and telecommunications. I want to see electricity quoted as another New Zealand success story.