ELECTRICITY REFORMS

DUNEDIN

Ladies and gentlemen, Hon Max Bradford, Minister of Energy, sends his sincere apologies for not being able to attend today's Conference.

Unfortunately, a combination of Parliamentary duties and difficulties with air travel has meant he has had to cancel his attendance at the last moment, and he has asked me to present his speech.

Recent weeks have seen some fairly lively debate about the electricity reforms - much of it, I must say, misinformed and misplaced. I can assure you that the Government would not have proposed such a comprehensive package of reforms for no good reason!

This week the Electricity Reform Bill will proceed through most, if not all, its stages in Parliament.

Let me take a few minutes to recap what the reforms involve, and the reasons behind them.

For more than a year now, I have been talking about the need for completing reforms in the electricity industry, begun in 1998 by the last Labour Government, and the direction proposed.

Why? Very simply, while reforms earlier this decade achieved considerable efficiency gains and significantly lower prices at the wholesale end of the electricity market, ordinary consumers have not benefited - in fact their power bills have gone up, even if you take account of the rebalancing of tariffs between industrial and household consumers.

The facts are clear. The wholesale end of the electricity market - almost all owned by central government - has delivered its end of the reform bargain, but retail power companies haven't.

This is obviously a pretty poor deal for householders. For small and large businesses, it's not just a poor deal, but it affects their competitiveness - particularly for exporters making their way in the tough international environment.

Electricity is a major cost to the New Zealand economy. We spend about $2.7 billion a year on electricity. Our relative costs internationally are nowhere near as good as they should be. Other countries are moving to reform their electricity industries - in order to achieve lower prices for their consumers. So new Zealand competitiveness will deteriorate unless we do something about it. If we are to equip New Zealand industry with the ability to remain competitive, the reforms begun a decade ago must be completed.

As I have said in speech after speech over the past year or so, and in consultation with many players in the industry, New Zealand has had to look at making the industry more competitive, reducing the costs and increasing efficiency.

There isn't any serious argument about the need for more competition - all industry players agree. But each sector in the industry has a different view about how to achieve it.

When working on the package, it became quite clear that there was a huge division within the industry about what needed to be done. The generators, most of whom are owned by the Government, said:

"The problem isn't us - the problem is at the retail end of the market. Every cut in our wholesale prices is absorbed in higher profits by the power companies."

And they're right.

Power companies were asked the same question and they said:

"Well, actually the problem isn't us - we're efficient. The problem is ECNZ, the dominant generator telling the market what to do and what not to do, extorting monopoly rents by their dominant position in the marketplace. Minister fix them up and everything will come right."

And they were right too. There is still room for greater efficiency in generator's costs. The problem is at both ends of the market - and both are being reformed.

The Finance Minister and myself announced a major package on April 7 this year - with the support of Cabinet and both the National and New Zealand First Caucuses:

ECNZ will be split into three competing SOEs in order to create real competition at the generation end; and

power companies will have to separate into competitive (selling and generating electricity) and monopoly companies (the poles and wires part of power companies) in order to create real competition at the retail end.
The aim is very clear - to get real choice and a better deal for all electricity consumers - particularly householders and small businesses.

There has been a lot of criticism and some hard lobbying from many of the power companies and trusts against the reforms. But it is interesting to note that not all power companies and trusts are opposed, nor are those opposed all in agreement with what they are actually opposed to. On the other side, there has also been vigorous support from the Consumers' Institute, the Manufacturers' Federation and the Major Electricity Users Group.

Let me look at some of the criticisms for a moment....

"The reforms will harm rural communities and remote users."

No, the reforms don't change anything. The present lines network is guaranteed until at least 2013 under the 1992 Electricity Act. Nobody will lose access. Nor do the reforms impact on power companies' current ability to cross-subsidise lines charges for remote users. There is nothing in the Bill that will force or require lines companies to charge their rural users higher prices. Just as it is now, the decision on lines tariffs will remain in the hands of the local companies and the trustees of consumer trusts which mostly own the companies. In any event, if companies do abuse their monopoly position, the Government will have regulatory powers to set tariffs or otherwise influence the level of tariffs.

"The reforms mean communities will lose ownership of their local power companies or trusts."

Again no. The Bill does not force local companies or trusts to sell to the private sector - the decision will be in the hands of local companies and trusts. There is likely to be some amalgamation of power companies, but the industry has known and supported this for some time. Trusts have the ability to set up mirror trusts to own the monopoly and the competitive companies, but they, can't grow without full ownership separation just as is the case for private sector companies.

"The Government ignored officials' advice."

The answer to this one is yes and no. The Government accepted the advice from officials with regard to splitting ECNZ into three companies (against the advice of ECNZ itself but supported by the power companies). It did not accept the early advice of officials promoting a full scale regulatory approach to control power companies (this approach is now being rejected in the UK and US), rather than separation of lines and energy businesses. However, Cabinet took other advice, and it is also very clear from the numerous background papers released recently that officials advised that if the Government opted for separation, ownership separation should be favoured over corporate separation. So we didn't accept a regulated approach, but we did accept Officials' advice to go for ownership rather than corporate separation (which was supported by the power companies).

"The Government just wants to privatise ECNZ."

No. The new "baby" ECNZs remain strategic assets and not for sale, as set out in the Coalition Agreement. And, as I've said, it is over the local community or consumer trusts as to whether both parts of their business remain trust owned - through separate mirror trusts - or one part is sold. This has nothing to do with the Government - the choice is in the hands of owners.

"The Government is ramming the reforms through Parliament."

No. The shape of the reforms has been known to the industry for many, many months. The full shape of the reforms was announced on Apr 7, nearly three months ago. The Coalition Government's handling of the Electricity Reform Bill has been a far more thorough going process of open discussion and deep consideration by all National and New Zealand First MPs on an issue of public policy than has happened in a long time.

Government MPs have had plenty of opportunity to raise any concerns, have been heard, and our Caucuses support the package. The high level of public interest meant these Caucus decisions were announced last week by the Prime Minister, the Deputy Prime Minister and myself.

The fact that some power companies and trusts don't like the result - all of whom have considerable self interest to protect - does not make the electricity reforms or the select committee process wrong, as some critics have claimed.

All consumers want and deserve a better deal from their electricity company. But they won't get this without choice, and they won't get choice without competition. We have seen the benefits of competition in the petroleum and telecommunication markets, for example.

We want the same benefits for electricity consumers - benefits already on the verge of flowing through to this part of New Zealand with the announcement last week of the Southpower, United Electricity and Enerco plan to merge.

As their press statement promised, the merger means "lower energy prices for customers". We are at the dawn of a new age in the electricity industry - I hope all players will seize the opportunities ahead.

Certainly, consumers will now be able to exercise real influence over their electricity prices and the quality of service they receive from their local power company - the power to choose another company if they don't like the service they are receiving, and the power to shop around for best prices.

These reforms are about giving power to the people, not leaving power with the power company.