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More Vision Needed In Electricity Policy

More Vision Needed In Electricity Policy

By Warren Moyes, Chairman, Electricity Network’s Association

The Government’s latest draft ‘policy statement on electricity’ provides a rare opportunity for the business community to influence the shape of an industry that is so critical for the country’s economic performance.

Over the past few years electricity users have seen the dramatic impact of low rainfall, low investment and inadequate back-up - 10% savings campaigns, price hikes that have nearly driven some companies to the wall, and large cuts in industrial production.

While a new dry year reserve trigger scheme is being set up to address the reserve generation shortage, a fundamental issue is that little was done to anticipate the problem in the first place. This lack of forward-looking policies can also be seen in the failure to provide adequate warning about the imminent depletion of Maui gas.

This new policy statement shows signs of the same myopia.

Over the past few years, especially, there have been several major “reforms” launched by successive governments with very questionable results.

The new policy statement signals yet another burst of reformist zeal, spread across a very broad front. Quite a few of its 109 primary clauses focus on topical issues, such as low fixed tariff options for smaller users, frequency of billing, consumer complaints processes, and safeguards against dry year shortages. These are important issues to customers.

Yet what’s conspicuously absent in the discussion paper is policy that mobilises the full resources of the industry to address critical investment needs, policy that addresses the drift of private investors out of the industry, policy on consistency in wholesale pricing arrangements, and a hard look at the options for replacing Maui gas in the energy economy. Even whether or not lines companies should continue to cross-subsidise farmers (a very significant part of the last two Government Policy Statements) is no longer a part of the policy package, suggesting that central government feels that this is best dealt with without guidance from it.

The end result of the reform process to date is that four State owned companies - Genesis, Meridian, Mighty River Power and Transpower - dominate the market, owning most of the generation, the national grid and most of the retail electricity business and its customers. Is this what customers want? The draft policy does not address this. In addition, a new government ‘Electricity Commission’ is being given regulatory powers to control power quality and security in much the same way that the old Ministry of Energy did. Around the edges the Commerce Commission is establishing a costly and complex reporting and surveillance process to oversee lines companies, while agencies such as the Auditor-General, the Parliamentary Commissioner for the Environment and the Ministry of Economic Development all have specific electricity industry administration functions that add to the weight carried by the electricity industry and its users.

Unless this government-centred bias is specifically recognised and addressed, then we need to be clear about the consequences.

The first is that private investors will continue to leave the industry just at the time when we are looking for new developments to fill the post-Maui gap. Will government, or more accurately consumers, want to again start paying for Clyde Dams as well as for costly Marsden-type ventures that never get used?

The second is that the two ‘i’s – innovation and investment - will continue to be stifled. A good indication that this is already happening is apparent in the proposal in the Policy Statement to move towards standardised line company contracts across the country. Retailers, using their dominant influence on government, are pushing for this, under the guise of making life easier for competing new entrant retailers. If the aim of this is to encourage new entrants into the retail sector then there are more fundamental tasks that should be much higher in the queue, such as the splitting of retail and generation or at least a compulsory hedge market for most generation output. Such standardisation, while superficially appealing, also ignores the many and varied issues that local lines companies have to reconcile in fairly spreading the burden of rural supply, maintenance of older parts of their networks, and patchy concentrations of load, across the broad base of customers.

Third, the Policy Statement sets the scene for Transpower to make major grid development investments, at a cost of over $1 billion, and ultimately payable by customers. If the Government is also wedded to the fast development of smaller power plants close to loads - a good idea given what’s happened in places like New York and Italy recently, then it is surprisingly blind to the implications of this investment.

In our view, recognising that we’ve moved back into a world where the government calls all the policy shots for the electricity industry, the business community needs to push for a policy platform that highlights principles such as:

A link to wider government objectives of economic growth, investment and innovation. At present one does not appear to exist.

Ensuring that proposals for new electricity contracts with government agencies, and for the renewal of existing special contracts such as Comalco’s, are transparent and exposed to public debate before commitments are made. Ensuring that electricity lines businesses are encouraged to play an active role in development of power supply options and infrastructure by urgently reviewing and reducing the regulatory cost burden and disincentives facing them. Ensuring that all electricity industry participants, including lines companies, are empowered to invest freely, and on acceptable commercial terms, in the wider electricity industry where their experience and business focus will be relevant to informed business decisions. This includes the capacity for lines companies to re-enter the retail sector to provide much-needed market competition and to encourage further investment in generation. Recognising that the dominant role played by state-owned entities in the electricity industry may be a deterrent to other investors' participating, taking steps to ensure that the relationship between SOEs and control agencies, including the Electricity Commission, is transparent and conducted on an arms-length basis. Developing transmission pricing policies that promote the construction of power stations close to major areas of demand to reduce losses in the lines, transmission investment needs and the environmental costs of additional transmission and generation plant. Addressing the problems that are emerging due to an exodus of skilled staff from the lines industry.

Submissions on the draft policy statement close on October 10. This is your chance to shape a policy that will direct how the industry will operate for many years to come. The chance may not be repeated.

Ends

Warren Moyes is Chairman of the Electricity Networks Association, the organisation that represents electricity lines companies. The draft Government policy Statement on Electricity can be viewed at: http://www.med.govt.nz/ers/electric/governance-gps/index.html

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