Transpower Future Direction Conference

  • Max Bradford
Energy

Thank you Ladies and gentlemen, and thank you to Transpower for the invitation to speak this morning on the progress that has been made to date in electricity industry reform, and my expectations for the future.

Can I start by saying the overall aim of the Government's energy policy is simply to ensure that:

electricity is available when required by consumers;
at the lowest possible cost to the economy, and;
ive consumers real choice and competition.
We have come a huge way in the last few months. Indeed, I think it would be fair to say that from the consumer's point of view we have come almost as far in the past six months, as we have in the past six years - since the 1992 Energy Companies Act corporatised Power Boards and the 1992 Electricity Act withdrew their supply monopoly

The earlier reforms went some way towards improving efficiency, particularly the Government's decision in 1995 to split off part of ECNZ to create Contact Energy. This created more competition in electricity generation and lowered wholesale prices to the distribution companies.

However in many cases they didn't pass those lower prices on to their customers, and domestic power prices rose 21% in the 10 years to 1997, while the wholesale costs fell by 17% between 1989 and 1997.

In fact, five years after deregulation of distribution there was:

declining level of competition;
Companies were using their lines businesses to block retail competition, and;
there was painfully slow progress on amalgamations.
It was very clear that a bold step was needed, and after much advice and consultation, Cabinet gave its support to the Electricity Industry Reform Act, which we passed just four months ago.

The aim is to get a better deal for customers by requiring ownership separation of lines from supply - both retailing and generation. It is interesting that the United Kingdom and United States have also been considering a similar approach.

An important component of the reforms announced in April this year, is the requirement for industry to develop a low cost metering system by April 1999 in order to allow small consumers to switch suppliers, with a mandatory default system if they fail to deliver.

This will give all customers access to the benefits of the very real competition that has now emerged in the main centres as a result of the Act.

I am pleased that past industry differences have been set aside and the Maria Retail Competition Committee, under the independent chairmanship of Dr Grant Read, is underway.

In my view, time-of-use meters offer the best long-term solution, in that they allow customers to manage their power usage and to decide where that power will be purchased from.

The focus of the industry is on developing a profiling system, initially simple enough to meet the April deadline, while flexible enough to evolve into a more complex, cost-reflective system, that will not preclude the use of half-hourly meters.

One significant issue emerging is that of ownership of meters, and access to their data. There has been publicity about meters being included in the sale of some retail companies. The Government has no view on who owns the meters - our sole concern is that whoever owns them allows open and unrestricted access to all players.

Once the industry committee establishes the protocols for both the governance structure for competition, and for metering issues, it will still take a commitment from industry to implement the system.

Let me assure you, there cannot be any slippage to the April timetable. If there is, chances are Government will step in to mandate a system, as we said we would do when the changes were announced in April.

The plans to split ECNZ into three competing retailers is well advanced. Viability studies show there is no reason why we shouldn't make a decision to proceed next month, with implementation expected in April next year. We are also working on "dry year" risks and how they can be accommodated within a competitive market framework.

And you're aware we're also planning a scoping study on the sale of Contact Energy.

As we look at what has happened since July, I must congratulate the power companies for the positive attitude they have taken, despite their initial opposition to the legislation.

Very rapid progress has been made in the separation of lines and generation and retailing, with mergers, divestments and new players entering the industry. Most power companies have so far chosen to stay in the lines business and sell their retailing and generation assets, with only one company to date choosing the "mirror trust" option.

More mergers between the monopoly lines companies are expected. On the retail side, I'm confident there will be even more vigorous competition than we are currently seeing in these early days.

Logic tells us we shouldn't have 37 electricity distribution companies for 3.5 million people, when the UK's 60 million people are served by 12 regional companies.

These are exciting times for domestic consumers and I congratulate First Electric and Contact for being the first off the blocks in competing for their business.

Hundreds of thousands of consumers now have real choice, and if prices fall by 15% as, for example, First Electric says, then more than $440 million a year will be saved by households and businesses.

To be frank, my goal of seeing real benefits for consumers has happened earlier than I thought it would. All we need now is to have that competition spread throughout the whole country.

But it isn't just electricity companies that need to respond - the Government has some things to do as well, including reshaping the approach to price control on line businesses.

In particular, in the lines business there are excessive costs and profits that need to be stripped out as part of our wider strategy to lower costs and improve our international competitiveness.

Ministers agreed in April to increase the threat of price control for the lines businesses, by empowering the Commerce Commission to apply controls within Government-set criteria or thresholds.

We are in the process of deciding how such a system could operate, should it be needed. It will be transparent and predictable, so that lines businesses can avoid price control by reducing prices and increasing efficiencies.

It is designed to give the right incentives to lines companies and will result in a penalty regime for those which abuse their natural monopoly position.

The Government will also monitor line charges closely to guard against undue rises for rural and domestic customers, and make sure vulnerable consumer groups are protected, as we said we would do as the Bill went through the House.

Again, I'd like to make it very clear that line companies will be inviting the Government to step in if there any concerns about monopolistic behaviour. I want to remind you that cross subsidies in lines businesses between classes of customers - such as between urban and rural - are quite acceptable, if that is what their owners (generally community trusts) want.

The information disclosure regulations are currently under review to give an effective means of assessing if monopoly rents are being taken.

Let me also leave you in no doubt that the Commerce Commission is now well prepared to take on its additional roles of enforcing the ownership separation and the arms-length rules, as well as monitoring the obligation on all parties not to attempt to thwart the purposes of the Electricity Industry Reform Act.

Before leaving the topic of ownership separation, I would like to mention the gas sector, in particular the statement a few days ago by the Board of the Natural Gas Corporation to the Stock Exchange that NGC is proposing to create three new listed companies from the existing NGC.

One company will run gas transmission, one will handle energy marketing and distribution and the third will focus on gas processing and generation.

The important point is that NGC is moving in this direction on its own initiative, without direction from the Government. I congratulate NGC on its initiative and look forward to seeing enhanced transparency and competition in the gas sector.

It is important that the gas sector follows a pro-competitive approach, in the same way as we are promoting in electricity, because of the increasing moves we are seeing towards "convergence" in network industries.

Further down the track we may need to examine our information disclosure regimes to ensure they are properly structured so that the information we want to have disclosed is still being made available as envisaged.

To conclude, I'd like to make some comments about Transpower - our hosts here today.

Earlier this year the Ministry of Commerce released a report that concluded there was no monopoly profit taking, nor did Transpower pass on excessive costs, or provide poor quality service. This is good news.

The report did highlight some concerns raised by power companies, about for example the valuation of Transpower's assets and other aspects of its pricing methodology. Work is progressing on these issues, including a full review of its ODV, which has seen a reduction of $544m.

Power companies will also no doubt welcome changes to Transpower's grid security policy which means their customers can now determine the level of grid security they want, letting them trade off the level of Transpower's services and prices.

And finally, a comment on the future - where we will have a highly efficient electricity industry with vigorous competition in all its contestable areas. In short -- a better deal for all consumers, and improved competitiveness for the nation.