Speech to Institute of Professional Engineers New Zealand

  • Max Bradford
Enterprise and Commerce

Good evening,

I am delighted to be here tonight in my own electorate among so many people with an intimate knowledge of the electricity industry.

It has been a year of dramatic change for the industry, not to mention furious politicking as Opposition parties have sought to turn the issue of getting cheaper power for consumers into a political football.

It has been hard, but vital work that will help to make New Zealand more competitive.

As a result of the reforms I announced in April last year:

* ECNZ has been restructured into three competing SOEs;
* The ownership of distribution line businesses has been separated from contestable electricity activities; and
* The industry has met the deadline for establishing low-cost mechanisms for consumers to change retailer.

In addition, we have seen the sale of Contact Energy to private owners - including thousands of ordinary New Zealanders.

Those reforms were the latest in a long line of changes that have transformed the electricity industry.

Once, it was a centrally planned cumbersome beast which tended to over-invest in assets, overcharge its customers, didn't pay tax, and still managed to lose money and provide poor service.

For example, in the 12 months to March 31 this year under ECNZ, the Huntly Power Station ran at 20 per cent capacity.

But, in the past three months when the reforms have been in place Genesis Power has run Huntly at 40 per cent capacity and is aiming for 60 per cent in the next 12 months.

Today, thanks to the reforms, power companies have been freed of the shackles of central planning, and are much nimbler on their feet.

The wholesale market and retail competition ensure more timely and cost-effective investment in generation.

Wholesale prices are about half the level they were, before the split of ECNZ.

Line and retail businesses now ignore consumer concerns about prices and
service at their peril.

Electricity consumers have already seen retail prices fall in areas where competition is strong.
Electricity is available today to more than one million New Zealanders at a price that is lower than the price they faced before the reforms begun on 1 April 1998.

The figure of one million represents more than 60% of all New Zealand consumers. A further 15 percent of consumers have had no price increases since the reforms begun 16 months ago.
Before the reforms began only 3-5% of New Zealand consumers had a choice of electricity retailer. Today that number exceeds 60%.

A good example of the benefit of the reforms can be seen here in Rotorua where a 1-2 person household occupied during the day using electric water heating and heating, can save around $177 annually by switching from TrustPower to First Electric.
The reforms have given consumers real choice and consumers are exercising this choice.

In the five months following the introduction of low cost switching, at least 25,000 New Zealand customers switched retailers.
If that switching rate continues for 12 months, it will produce a rate for the year of over 6 percent.

This compares favourably with other countries where retail competition has been introduced. For example, in the UK and Norway, the rate is around 5% in the first year.
Examples of retail competition spreading include.

1. Meridian Energy announced in May that it would compete for retail customers in Marlborough and that savings for Marlborough consumers will be greater than those available under TrustPower's loyalty scheme.

2. Combined Rural Traders Society and Meridian Energy have set up a bulk power purchasing facility which will provide members in the rural Otago region savings of up to forty percent on their power bills.

3. Federated Farmers and Wellington consultancy firm Energy Group Limited have launched the Power Club.

The club will put the collective business of its members out to tender to secure the best deal from electricity suppliers. Savings for members on power bills are expected to be in the order of ten percent.

4. New Zealand Dairy's retail chain, AnchorMart, has signed a supply agreement with Mighty River Power, which will offer over nine thousand North Island dairy farmers considerable savings on their energy bills.

5. In Auckland, Empower has signed up more than 1400 businesses and has achieved, on average, savings of fifteen percent on power bills for its business customers.

6. Meridian Energy has formed an alliance with Sky Television, effectively making Meridian a nationwide electricity retail company.

7. Todd Energy has started a new energy retailer, Fresh Start, in an alliance with King Country Energy and Bay of Plenty Electricity.

Fresh Start will compete against Genesis in the Taranaki region and has started a direct mail campaign to households offering discounts on current energy prices.

Being able to choose suppliers and then exercising that choice, are crucial to the success of the reforms.
The Government has helped people switch to cheaper retailers by setting up the PowerSwitch information service.

This facility, run by the Consumers' Institute, helps consumers find the best electricity deal in their area and offers advice on how to save money using the various pricing options available from a current retailer.

In first half of this month, the PowerSwitch website received over 12000 hits and the service's 0900 helpline has fielded about 40 calls a day.

Thanks to new information disclosure provisions introduced earlier this year, consumers will have access to more and better information about line
businesses' performance.

Some of you in this room may be involved in preparing asset management plans or projections of reliability performance, both of which were added to the disclosure Regulations this year.

The ready availability of this and the other disclosed information will show up line businesses that are compromising on reliability.

But the job is not finished.

For instance, there's the "significant matter" of line company price or revenue control legislation, which is before Parliament at the moment.

The benefits of wholesale and retail competition could be lost if line businesses don't reduce their costs and prices.

Over the past few months, there have been some unsettling trends in line companies' pricing.
Instead of falling, as they should be, line charges - which account for around 50 per cent of electricity costs - have increased or stayed the same on average.

A few companies have reduced their lines charges but they are the exception.
Some - but not all - lines companies have not passed on to consumers the lower costs they now enjoy from the sale of meter and billing systems as well as lower Transpower prices.

In addition, some companies stand accused of ramping up their ODV asset valuations.
The lines company control bill will place all electricity line businesses - including the state-owned enterprise Transpower - under revenue or price control if they are found to be overcharging by the Commerce Commission.

Claims by some commentators that this represents a step back from our commitment to an open and competitive economy are simply political claptrap.
This price control is targeted exclusively at a natural monopoly sector where competition is not possible.

The Labour-Alliance bloc, Act, and New Zealand First have all failed to support the bill, but Labour has been the most hypocritical.

Labour MPs have repeatedly called for tougher competition law - which the Government is providing -but sided with the monopoly lines companies when it came to a vote on electricity.

As has often been the case they talked tough, but sat on their hands.

The Bill will be left to sit before The House.

It will be ready to go when this Government returns after the election.

We will complete the unfinished business.

The Government never promised that the benefits from the electricity reforms would happen overnight. It was always expected that it would take 12 - 18 months for the full benefits to flow through to all New Zealanders.

It takes time for companies to put in place new billing systems and co-ordinate the change over of meter reading. My understanding is that companies are well advanced in addressing these issues.

By the end of this year, I would expect competition to be even more widespread, prices will continue to fall and the process of switching electricity retail company will be a straight forward and simple exercise.

The electricity reforms are all about cheaper power for New Zealand consumers.