OPENING ELECTRICAL ENGINEERS ASSOCIATION CONFERENCE

  • John Luxton
Associate Minister of International Trade

Special guests, ladies and gentlemen. Welcome to the 1997 Electrical Engineers Association Conference, "the pre-eminent organisation for engineers and technical staff in the New Zealand electricity industry" as your publicity materiel says. Thankyou for the opportunity to talk with you today.

As the former Minister of Energy involved in setting up the framework that we operate in today, as Minister of Commerce, responsible for competition policy, and of corse, for this week, as Acting Minister of Energy, I have more than just a passing interest in the electricity sector.

I want to talk with you today about the Operation of the Electricity Market from a Competition Policy Perspective.

Background
Regulatory Reforms
The underlying principle of regulatory reform in New Zealand since the mid 1980s has been that economic growth is best achieved by facilitating competition where possible.

The Government's policy in recent years has been to rely on general law, in particular the Commerce Act, to regulate particular sectors of the economy rather than to enact industry specific regulation. This policy has been visible both in the deregulation of the telecommunications and electricity sectors of the economy.

The objectives of this policy are to encourage economic efficiency, competition and innovation and to cut costs and prices. Such a policy benefits consumers as well as the New Zealand economy as a whole.

As a result of reforms in the electricity sector, notable efficiency gains have been made. Sure it has not been instant, but over a decade, huge gains have been made. And there is more to come.

In the energy sector, regulation focuses particularly on the natural monopoly components of the industries (ie the wire and pipeline components of transmission and local distribution) where concerns relating to dominance are greatest.

Requirements on components where competition is possible (energy retailing, electricity generation and gas wholesaling) are much less stringent.

Commerce Act and Information Disclosure
One of the key elements of the Government's regulatory regime is the reliance on the 1986 Commerce Act to promote competition in New Zealand markets. The Act is based on the principle that society's resources are most efficiently allocated through competitive forces. The economy benefits from competition through:

more efficient businesses;
a wider choice of goods and services;
higher quality products and services and
competitive prices.
Extensive information disclosure requirements facilitate both negotiations with electricity businesses and recourse to the provisions of the Commerce Act.

Collectively, information disclosure is designed to help:

discourage monopoly pricing;

promote competition in electricity retailing and generation (eg by clearly ``ring fencing'' natural monopoly and potentially competitive sectors);

discourage uneconomic electricity generation; and

discourage excessive cross subsidies between consumer classes.
Advantages of Reliance on General Competition Law
The advantages of the Government's approach to the regulation of the electricity market are that:

It places the responsibility for access and pricing of line and pipeline facilities with market participants. These participants have the best incentives to deal effectively with the issues. Negotiations and agreements can take place without government involvement;

Disclosure of information promotes comparisons by customers and commentators of the financial and non financial performance of line and pipeline businesses. This encourages self regulation by businesses, aimed at restraining profits, minimising costs and improving efficiency;

Parties affected by any abuse of a dominant position have the incentives and ability to monitor market performance. They can decide what level of prices and performance they are prepared to accept. The costs of constraining the market behaviour are met directly by the market participants;

Competitors and consumers are encouraged to use a wide range of dispute resolution procedures. Interested parties may use direct negotiations, or the court, backed up by information disclosure and the independent authority of the Commerce Commission to seek redress, if required.
Disadvantages of Increased Government Intervention (Heavy Handed Regulation)

Businesses focus on the regulator, rather on competing. Firms expend monetary and human resources to comply with, and attempt to avoid, or to change the application of regulations;

Reduced incentives on parties to resolve disputes;

Tendency of the regulatory body to take over business decision making;

Inflexibility in developing efficient market responses to changing market circumstances;

Regulations which in effect guarantee firms a cost plus rate of return do not provide strong incentives for firms to minimise costs, and can foster uneconomic new entry;

Regulators tend to be captured by interest groups, usually the industry, as close working relationships are developed;

Regulations not tailored precisely often fail to achieve their intended purpose (indeed, they can have undesirable unpredicted consequences) - regulators often face information and administrative/legislative lags in keeping the regulations in line with changing market developments; and

The administrative costs of the regulator, which can be substantial, are often borne by the taxpayers rather than those affected by the industry.
Effect of Changes on the Electricity Industry
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.

The deregulation of the electricity market at the retail level took place some four years ago now.

Not unexpectedly, it has taken a while for retail competition to start to take effect. I say not unexpectedly since the slow, but accelerating emergence of competition is generally characteristic of newly deregulated markets.

Certainly, our experience in the telecommunications market was that it took around three or four years before competition really got underway.

Suppliers who have had a monopoly for the best part of a century have to get used to the idea of facing competition, and, more importantly, providing competition in territory previously closed off to them.

New ways of thinking and new institutional arrangements are required.

Access and metering agreements, which are technically complicated, have to be agreed.

Crucially, in the electricity market, several further key steps were required following legal deregulation in 1992 before serious competition could be expected.

These steps included the separation of Trans Power from ECNZ in 1994, the negotiation of a national Metering And Reconciliation Agreement (MARIA), and the establishment of a new wholesale electricity market, including the breakup of ECNZ.

The development of competition at the generation end was and still is a key step in encouraging competition at the retail end, since competitive opportunities are greater where wholesalers and retailers can obtain differentiated ``product''. If everyone buys the identical product at the same price from the one supplier, the scope for new entry , while not eliminated, is curtailed.

The wholesale market, as you know, only got underway late last year. So it is very early days yet in the emergence of competition, including retail competition.

The signs generally are encouraging. Around 7 percent of the market is currently being supplied by out-of-territory suppliers. The threshold at which competition is viable is steadily coming down.

Moreover, the impact of competition should not simply be judged by the market share of new or out-of-territory suppliers.

New generation is coming on stream at a much lower cost than some of our sources of generation over the last 30 years. The taxpayer will should never again be called upon to subsidise electricity consumers for the likes of Turangi, at over 28cents/unit or Clyde at 14-15cents/unit Private investors are providing new generation as low as 5 cents into our market.

Similar points to these were made recently in a review (released 12 May) of New Zealand's energy policies by an expert team from the International Energy Agency. In an unprecedented endorsement of any country's policies, the IEA has held New Zealand's energy sector deregulation and reform up as a model for other countries to follow.

The IEA noted that ``There are already signs that the reforms so far implemented are bearing fruit, in the form of increased efficiency, lower costs and enhanced consumer choice and service''.

Our belief that open and competitive markets would best provide diverse and sustainable energy supplies at the lowest possible cost has been justified.

Future Challenges and Developments Regulatory regime Access to facilities owned by incumbent suppliers has raised a number of questions regarding the effectiveness of the regulatory regime.

We rely on the Commerce Act and a comprehensive disclosure regime to protect against these incumbent suppliers restricting access to their facilities.

The previous Government considered whether existing regulation is sufficient in order to deal with outstanding perceived competition issues. The conclusion reached was that while the existing regime is not ideal, neither are the alternatives.

None of the options considered could be shown at that time to have clear benefits over the status quo. However, we will continue to monitor developments in these industries, to evaluate any potential means of improving on existing regulation.

The Government remains committed to light handed regulation as the most appropriate regime for natural monopolies.

I think it is important to note that solutions to issues in an industry such as yours is not easy. Experience elsewhere suggests that all regulatory options have failings in some form or other. What is important, is that any proposed changes are well targeted and will represent an improvement over what we have now.

Another issue raised in the context of industries where access to facilities is essential but which goes to the heart of the effectiveness of the Commerce Act is the effective enforcement of our competition law.

Analysis indicates that current penalties, remedies and cost awards are low by international standards. The courts also have been very reluctant to impose other remedies available under the Act.

This raises questions about whether the Act provides sufficient measures to correct present or future anticompetitive behaviour or to deter future breaches of the Act. My officials are continuing work to analyse these issues, and to consider whether amendments are required.

In addition to this general work on the overall regulatory regime, the electricity sector has benefited from further specific work. I understand EMCO has undertaken an initiative to develop improved use of system agreements.

The Government welcomes industry initiatives such as this. The Ministry of Commerce is also doing work to tighten up the information disclosure regime.

The criticisms of some about the effectiveness of the light handed regulatory approach needs to be taken with a grain of salt. Much of it is from lobbyists who want the Government to move the goalposts closer by intervening and shifting equity from their competitors balance sheet to their own.

Others represent groups who are loosing subsidies of the past which they would like to retain.

There is legitimate protest about two areas however. One where companies have used anti competitive tactics to preserve their own business at greater cost to the consumer.

The other is the activities of some community trusts and Local Government owners who seek to distort the market for political advantage. They represent an outcome which has slowed down the opening up of the electricity sector to real competition.

Metering
The cost of metering and data reconciliation is widely recognised as one of the key constraints to the development of retail competition for consumers.

The problem arises, as I'm sure you all know, because electricity is now bought and sold in the wholesale market in half hourly time slots. This means that the incumbent supplier and the new entrant or entrants need to be able to determine in some way how much power has been consumed by their respective customers during each half hour in order to settle up with the generators and bill their customers.

This process is straight forward where meters have been installed at the customers' premises which are MARIA-compliant; that is, which meet the accuracy and data logging specifications set out in the MARIA agreement.

In this case the reconciliation of who owes how much to whom can be done by the National Reconciliation Manager in the wholesale market. The problem is that MARIA compliant meters are still quite expensive.

Of course, the cost of MARIA compliant meters is coming down all the time with technological advances and as demand for time-of-use meters steadily increases world-wide as more countries go down the track of deregulating their electricity industries.

Furthermore, there are questions which can be legitimately asked as to whether the MARIA specifications are unduly restrictive, which clearly has cost implications.

Indeed some allege that the MARIA specifications are deliberately kept high by the industry as a barrier to the development of competition.

We have no evidence to support this view, and certainly if it was the case then it would appear to be in clear breach of the Commerce Act.

As many of you know, EMCO is in the process of reviewing the MARIA specifications, and I am sure it will be seeking to reduce any over-specification in the interests of encouraging competition.

I am following with interest the developments in the industry on metering, in particular the progress of the power companies who are investing in innovative metering which will give consumers greater control of their power costs and choice of supplier.

There is a distinct possibility we could have that sort of technology up and running in the next year or so. That really will bring change in this sector and the market will improve accordingly again.

I acknowledge that for many within the industry the need to cope with change over the last decade has not always been easy. But unless we make these changes as an industry, or as an economy, then we expose New Zealand to being less competitive internationally, to falling living standards and higher unemployment.

Conclusion
In conclusion, we have come a long way in the electricity sector, but we still have some work to do. I would like to wish you well for the success of your conference. I now declare the Electricity Engineers Association annual conference open

Thankyouv