TO THE ENERGY FEDERATION

  • Bill Birch
Enterprise and Commerce

Today you launch an exciting new organisation. I am confident it will over time play a key role in improving the lot of all New Zealanders. 

the challenges the energy federation and indeed, all players in the energy field, will face are, in my view, not only daunting, they are in some respects contradictory.

our economic survival in a globalised world depends on continuously improving new zealand's competitiveness.

rising living standards and creating more jobs means doing things better, smarter and cheaper than our trading-partners.

yet apparently pulling in the other direction are environmental hurdles which often place extra costs on industry and ultimately you and i.

perhaps this conundrum is brought into sharpest focus by the impact of our international obligations under the climate change/co2 emmission conventions, and by the considerable success of the energy reforms in the last few years.

the former will tend to push energy costs up, and thereby harm new zealand's international competitiveness.

the latter has lowered real energy costs, and improved competitiveness.

on the surface, they are contradictory, and, if handled wrongly, could undo much of the economic progresss of the last few years.

but, in the confines of a proper economic framework, and the innovative use of technology, we should be able to continue the progress of the last few years and turn an apparent contradiction into a win-win outcome for new zealanders, for industry, and for an informed world environment.

today's merger of two agencies in the energy sector is an important step in improving sector coordination, r & d, and information flows to and between producers and consumers.

i applaud the rationalisation of resources that will result as the two energy bodies merge. this will place the energy federation in a better position to contribute to the advancement of thinking in the energy industry.

i have no doubt you will want to ensure the government is kept up to date with your thinking, and i anticipate that your input will sharpen the development of rational and relevant policy.

importance of energy sector
energy is vitally important:

as an industry input
for international competitiveness
as an essential part of our lives-without electricity how could we have had the communications revolution?
for its use of natural resources and its impact on the environment
international competitiveness has never been more important. exporters are facing increasing competition and new barriers into some of our markets.

relatively low energy costs are one of new zealand's natural competitive advantages.

increased efficiency in the energy sector is one way of relieving pressure on the tradable goods sector.

general approach my overall philosophy is similar to that of my predecessors.

competitors and markets deliver centralisation and monopolies don't.

competition has lowered the overall price structure of energy in real terms.

downward pressure on costs, better service and better products compared to all the alternatives, competition delivers faster responses to: customers' needs technological innovations; and to changes in the market.

the chronic overbuilding that occurred in the electricity sector during the 60's and 70's, a result of slow responses to changing markets, would not have occurred in a competitive market where investors have their own money at risk.

private investors have far better incentives than bureaucrats playing with taxpayers' or ratepayers' money to accurately judge the risks and returns.

here and overseas, there are countless examples of the benefits of competition. the quantum leap in service and quality, with lower prices, in telecommunications, transport, airlines and motor vehicles are obvious examples.

in the end, we as individual consumers, benefitted from allowing competitive markets to work.

so, wherever possible, my first aim is to allow competitive forces to work, and for those forces to reach as far as possible.

nevertheless, the principal beneficiaries of competitive markets must ultimately be the consumer of the services produced. allowing barriers to competition, and therefore higher consumer prices to persist, only props up inefficient management and over-rewards shareholders given the inherent business risks involved.

it is the government's role to ensure, through its structural reforms, that market power cannot be abused. the specific instruments for ensuring this are the commerce act, and information disclosure regimes.

i have a preference, but not a dogmatic preference, for light- handed regulation to address issues of market power and natural monopoly.

information disclosure in particular should allow industry players to monitor each other, and facilitates the use of general competition law against each other.

do not underestimate the savings from not having to spend millions of dollars on regulatory mechanisms.

having outlined my general philosophy, let us now look at each of the energy sectors in turn, to examine specific issues.

oil

oil security
oil security issues have always been important to the economy.

local production offers obvious benefits in terms of tax revenue and royalties, and clearly it assists our balance of payments.

but it is not a goal to be pursued at any cost. many highly successful economies, such as singapore, taiwan and japan, are fully dependent on imports.

a well designed royalty regime is essential. a state-of-the-art regime was introduced in 1995, which appears to have stimulated increased interest here .

we need to monitor the regime to ensure it remains competitive.

petrol and diesel prices
petrol and diesel prices are close to the hearts of the country's many motorists, and to the pocketbooks of businesses and exporters. there is some evidence of rising petrol and diesel importer price margins which is of concern to the government.

i am keen to see more vigorous competition in the new zealand petrol and diesel markets. this competition should extend to price, and not just service.

rising margins are likely to encourage new entry into petrol retailing. i would like to see supermarket chains and the proposed new supermalls take up the challenge of retailing petrol. such outlets are common in other countries, and definitely put pressure on prices and i dare say wholesaler margins.

australia, following the lead of countries like the uk, france and japan, is starting to see petrol retailing by supermarket chains, and i hope entreprenurial spirits in the supermarket industry here will follow suit. i intend to ensure any barriers which may prevent the emergence of competitive retailing by supermarkets are removed, to the extent that government can assist through its policy framework.

gas

gas supply
one of the clouds on our energy horizon concerns the maui field. as you know it will depleted within the next ten years or so. obviously further discoveries of gas fields are important particularly for electricity generation, and, if the price is right, to keep existing investments in petrochemicals going.

gas is a premium fuel for electricity generation: it has relatively low environmental impact and modern plants are highly efficient, can be built close to loads, on a small scale, and very quickly.

the government has put more attractive policies in place to encourage a balanced exploration programme to be undertaken specifically:

a new mineral tax regime in 1992;
removal of price control in 1993;
a new royalty regime in 1995; and, most importantly,
an attractive overall business climate.

gas reticulation
the government reforms have included deregulation of a gas industry, characterised by a pipeline natural monolopy and large quantities of gas tied up in long term take-or-pay contracts. the commerce act is designed to ensure access to pipelines, and is backed by an information disclosure regime. the information disclosure regulations for gas are at a very advanced stage and are expected to be in place in the next few months..

the industry, through gas house, is doing an excellent job in developing codes for gas trading, pipeline access, and metering and reconciliation. i strongly endorse this process, and offer my support for the speedy progress in completing these tasks.

as i have made plain, i am determined to ensure the benefits of competition seeps into every section of the industry, including gas. if the present regulatory regime and industry initiatives are insufficient to establish genuine competition, or result in very limited competition, then we will need to review other initiatives to achieve the governments' objective.

coal
new zealand has huge reserves of coal. coal exports are steadily increasing.

it is widely used in industry as a competitive fuel, especially in the dairy industry.

coal is the obvious "back stop" fuel for electricity generation if significant new gas reserves are not found. there have been, and will continue to be, significant improvements in the efficiency and cleanliness of coal-fired generation. there is also good potential for underground coal gasification to fuel power stations.

however, climate change policies, which are increasingly important, are likely to have a significant impact on the coal industry. the industry is well aware of this and has made a constructive contribution to the climate change debate, including being closely involved in the development of voluntary agreements to reduce co2 emissions.

electricity
the electricity sector has faced major reforms in every area. these include the deregulation of the retail sector, the separation of trans power, from ecnz.

the formation of contact energy and allowing new, private sector generators to encourage competition in the generation sector; and the establishment of a wholesale market.

our wholesale electricity reforms are now regarded as some of the best in the world.

in the retail market, the removal of franchise areas has opened the way for retail competition, with competitive prices for larger customers, and improved customer service.

in the wholesale market, independent generators are showing a high level of interest in new investment, indicating that we may have got the framework for new investment about right. it is early days as yet though.

such a high level of interest in new entry restricts the dominant generators' ability to raise prices. prices have ceased to be cost-plus. we are seeing cost reductions by the generators despite rising fuel prices.

the new stations are better located, more efficient, and the majority of projects are small scale and based on renewable sources.

in electricity the areas i will be paying particular attention include the following:

competition for domestic consumers
domestic consumers have not yet seen the benefits of the reforms. it is unfortunate that historically there were such large cross-subsidies from the commercial sector to the domestic sector with businesses typically paying around double the price of domestic consumers. the removal of these cross-subsidies over recent years has meant that prices to the domestic sector have risen somewhat. despite this, domestic prices are around 8% lower in real terms than in 1980.

however, there is no excuse for poor customer contracts. in a competitive environment, no company with a regard for consumers, would get away with such a cavalier `take it or leave it' attitude as we have seen with some power company contracts.

i expect the industry to take a good hard look at its domestic contracts and ask itself whether the requirements would be realistic if they were seriously at risk of losing that customer to a competitor.

i will be following with interest esanz's development of two codes of practice -- one for domestic contracts and another for standards of domestic metering.

there have been some exciting developments in metering technology. costs are reducing, and innovative proposals are being investigated.

i am pleased to see the initiative by the electrical development association in furthering these ends. i also applaud those metering companies and power companies who are investing in these innovative developments. southpower, dunedin, eastland, trustpower and electropower spring to mind.

the industry must ensure that there are no barriers to the introduction of new metering technology, and that new entrants do not bear the entire costs of creating a competitive retail market.

it may be consumers should be given the opportunity to purchase their own metering systems to allow diversity and innovation to occur. after all, they can own their own telephones, so why not electricity meters?

consumers and government will get very impatient with anyone impeding progress, for example through making it difficult to achieve access to lines or having onerous system agreements.

pricing of lines, and access to lines.
the lines are the natural monopoly sector of the retail electricity business.

where companies won't or can't face competition, we must ensure they don't:

overcharge customers,
cross-subsidise generation investments
cross-subsidise retailing, or
deny access to competing retailers.
such activities will attract the unfavourable scrutiny of consumers, competitors, and the commerce commission. the information disclosure regime will help to discourage such behaviour in the first place, and assists in making such activity transparent if it does occur.

it is perhaps timely that the commerce commission has announced the end of the honeymoon period for power companies and is taking a more pro-active approach to promoting pervasive competition in retail electricity supply.

the information disclosure requirements will be tightened up this year.

specifically i intend to clearly separate out and tightly ring-fence the natural monopoly components from contestable activities. line businesses will have to leran to operate in a gold-fish bowl, where their activities, charging systems and contracts will be more transparent than at present to customers and competitors alike.

fixed charges
high levels of fixed charges attract much attention from: smaller consumers who pay a higher cost per unit; those who wish to develop very small scale generation for self use (solar and wind for example); all of us interested in energy efficiency, as consumers have less incentive to invest in energy efficiency products; and from the gas industry, to ensure interfuel competition.

this is a complex area . fixed charges do have a role to play, for example in ensuring that intermittent users, such as holiday homes, have every encouragement to use the most environmentally efficient source of energy.

the coalition government has pledged to review the role of energy charging regimes, which obviously must include the role of fixed charges.

furthermore, if line businesses recover most of their costs by fixed charges, they don't have an incentive to promote increased electricity sales. on balance, however, the government's position is that fixed charges must not be used to excess, and must continue to be moderated.

transmission pricing
transmission pricing has received a lot of air time recently, especially pricing for the cook strait cable. while recognising the need for fairness, transmission prices also need to give the right signals on the need for, and location of new generation.

pricing the cook strait cable is an extremely complex and vexed issue. the government wants the parties to work out a solution within the overall guidelines set down by the government. the government is keeping this matter under careful review, and may be faced with having to take further steps to resolve the current impasse soon.

climate change
i started out this speech by referring to the apparent conundrum between our international responsibilities under the climate change conventions, and obtaining lower energy prices in new zealand. in recent years, climate change has emerged as a major and highly complex issue. the seriousness with which it is taken at high level international negotiations indicates the scale of the potential risks facing us all.

while there are disagreements in measuring how much the climate has changed and will change, in predicting what the effects will be, and in identifying how best to respond, there is no doubt that we must play our part in prudent risk management. this includes ensuring that least-cost approaches are taken internationally, and that developing countries do their bit.

we must also ensure we do not get out in front of our main trading partners, putting us at a competitive disadvantage while not making a scrap of difference to global emissions. indeed, unilateral action could even worsen emissions if we import products we previously made locally from less environmentally concerned countries.

our current climate change programme is multi-pronged, involving: an energy efficiency strategy, being implemented through eeca, voluntary agreements, energy sector reforms, and absorption through forest plantings.

there has been good progress, especially with voluntary agreements. i would like to thank those of you in the energy industry who have signed these, and urge others who have not yet to consider the possibility.

to summarise, we need to ensure that new zealand plays its part, but also does not penalise itself (for no gains in lowering global emissions) by getting out in front of other countries.

conclusion
in conclusion, i think that the energy sector is generally in good shape, both in terms of the reforms completed and in terms of its ability to handle further change. there are some crunchy issues facing us but the major steps have been taken. you will not be seeing a major reversal of direction, but rather a keen interest in realising the gains to be made through pushing competition into more of the markets.

of course, the initiatives will come from you, the industry, as you compete.

ministers of energy no longer have a role as big brother, taking responsibility for your success or failure. instead, i take responsibility for the fairness and effectiveness of the regulatory regime we establish. if the energy federation is prepared to contribute to the debate at that level, then i believe that we will have a very successful relationship and the new energy federation will have a bright future.

ends