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Pete Hodgson Speech - Energy Trusts Of NZ AGM




Embargoed until delivery: 2.15pm 31 March 2000


Mr Arvidson, ladies and gentlemen.

Thank you for inviting me to speak to you today. Today is the first chance that I have had to meet with Energy Trusts, as a group, since the election, though I have met or spoken with many of you individually over recent months.

This afternoon I propose to talk about the following:

* the electricity Inquiry and my views on how we will move forward to address the difficult issues relating to your industry;
* an electricity ombudsman;
* management options for lines businesses;
* energy efficiency.

First, the Electricity Inquiry. As you know, the Inquiry was established in February. It will report to me by mid-June. Interested parties provided their written submissions to the Inquiry in March and the Inquiry is today a bit over half-way through the hearings. Your association has of course made a submission.

We have been extremely fortunate to secure such a high-calibre team to undertake the Inquiry. I have no doubt the Inquiry report will make a significant contribution to help us move forward in resolving the difficult issues concerning this industry.

The depth of concern that exists in the community is evident from the large number of submissions received – well over 400, including many from consumers complaining about prices and billing practices.

You are no doubt aware that regulation has its shortcomings. For that reason we are keen to see self-regulatory mechanisms and industry solutions used to the maximum extent feasible. But the interests of consumers must be well served. If the electricity industry does not produce viable, well-designed solutions which put customers first, then the Government will regulate. The message that I have been repeating around the country is that we will adopt industry solutions where possible and regulatory solutions where necessary.

This Government intends to move as quickly as possible in considering and acting upon the Inquiry report where industry response is insufficient. Consumers and industry players need to have clarity and certainty on the future regulatory environment.

We are therefore determined that the Government will resolve issues as quickly as possible. However, you may be assured that there will be none of the unseemly haste and ad hoc knee-jerk reactions which were characteristic of the previous Government in its dealings with the electricity industry.

I hope that we can keep new legislation on this industry at a minimum. However, any new legislation which we decide is needed will be introduced later this year.

I understand that your organisation supports the proposal to establish an electricity industry Ombudsman. This is encouraging. Industry support for such a proposal is essential if it is to progress.

As you know, the role of an industry Ombudsman would be to investigate and resolve disputes between customers and electricity companies. Becoming involved in deadlocked disputes between companies and their customers means the Ombudsman gets a close-up look at industry practices. The Ombudsman is therefore well placed to identify problems and deficiencies in those practices and to assist the industry to raise its standards.

One of the bonuses of an Ombudsman scheme is that it will mean that electricity companies will need to ensure they have well organised and documented complaint handling procedures. This is needed because, typically, an Ombudsman only deals with disputes when the company and complainant have been right through their complaints-handling and negotiation procedures and have been unable to reach resolution.

The Ombudsman would make independent decisions on what is fair and reasonable and may have regard to principles of good industry practice. An Ombudsman can play an important role in ensuring that self-regulatory schemes are credible and robust.

The Ombudsman would not become involved in setting prices or charges. He or she would not be a price regulator. Questions of how line prices are set, are, of course, amongst the terms of reference for the Inquiry, but an Ombudsman has no role here.

My view is that an Ombudsman could make a very effective contribution in improving the effectiveness of the operation of electricity markets. This will, in turn, give consumers a better deal.

One issue which I understand is on the minds of Trusts is that of amalgamations. As you know New Zealand has a very large number of line companies for a country which has only a very small population. It has therefore frequently been suggested that there should be mergers between line companies which will allow them to achieve greater economies. I should say at the outset that the words amalgamation, merger and certainly takeover can get people upset in a hurry. Please be clear that issues of ownership don’t concern me. Trusts own their assets and they will sell them or not sell them as they see fit. This topic is not about ownership, it’s about management.

I understand that Nathan Strong from the Institute of Economic Research has spoken to you about the very interesting work he did for the then Ministry of Commerce analysing the data collected by the Ministry under the Electricity Information Disclosure Regulations. The point of the project was to assess whether the information collected under the regulations could be used as a basis for benchmarking which would trigger price control on individual lines companies which consistently performed poorly.

The Institute concluded that the data collected was not good enough to form the basis of a benchmarking scheme. However, the Institute’s conclusions related to information collected under the 1994 version of the Electricity Information Disclosure Regulations. Since then there have been significant improvements to the Regulations. Analysis of the data collected under the improved regulations may result in different conclusions. However, we need to have another year or two’s worth of data before further analysis will be possible.

The results of the analysis based on the earlier data suggested a surprising finding, which was that network amalgamations may not significantly reduce costs. The Institute’s findings on this issue are rather different from other studies which have generally concluded that there are economies of scale in this industry. As I have already mentioned, I expect that the results will look a bit different when we have enough improved data to repeat the analysis.

I would note, however, and I think Mr Strong would support me in this, that there are likely to be cost savings in the corporate/strategic management area if small line companies amalgamate. It seems pretty obvious that in areas such as accounts and payroll sections, computer systems and the like, one large company is not going to need ten times the number of employees as ten small companies or to need ten computer systems.

I would, therefore, encourage you to give serious consideration to innovative new management structures, by way of amalgamation or otherwise.

Of considerable interest in this debate about amalgamations and economies of scale is the recent announcement that two line companies, Network Waitaki Ltd and Alpine Energy plan to establish a joint management company, Networks South. The main impact of the new management company will be on the management, corporate and planning staff, who will be co-ordinated in one location. The companies expect to achieve ongoing savings from this approach.

This reinforces the comments I have just made, that economies can be achieved in the managerial area. The Waitaki and Alpine initiative certainly looks like a useful approach. It is well worth exploring by Trusts and the line companies in which Trusts have ownership interests and I encourage you to look into it.

I will turn now to a topic of great interest to me, that is, energy efficiency. I have recently written to Trust chairmen suggesting that you focus on energy efficiency, which can be an excellent way of returning Trust income to Trust beneficiaries.

Energy efficiency is at the heart of the Government’s energy policy. It is one of those rare areas where everyone wins and no-one loses.

It makes economic sense for consumers. That is to say, it is smart to be able to reduce the costs of energy by needing to use less or getting more value from it. We do it with almost every other good and service that we use in society.

Energy efficiency has significant environmental benefits. It therefore has a crucial role to play as this Government begins to grapple with the difficult policy area of climate change. If you use less energy you emit less CO2. And if you use less energy that means fewer new electricity generation stations are needed, less oil needs to be imported and so on.

Third, energy efficiency has an employment benefit. It is not likely to be a huge employment gain. But energy efficiency measures tend to be labour intensive, whereas if demand is met by increasing supply, we will face capital intensive generating initiatives.

Finally, energy efficiency can have significant health benefits. If a home or workplace is made more energy efficient, people will enjoy increased warmth and comfort. We know that the temperature in many homes in New Zealand is below healthy levels in winter and there is evidence of higher death rates. Warmer houses are therefore very important from a health perspective. We get warmer houses either by using more energy or by insulating.

If energy efficiency is so good, the question might arise, why does it need any Government involvement at all? Why don’t people just rush out and invest to become energy efficient? Why does the market fail? The literature on that issue is immense but most importantly, people need good information and advice about what they should do.

Energy efficiency needs promotion, it needs visibility, it needs performance standards and it needs Government leadership. It will get all that from this Government.

Needless to say energy efficiency is not limited to the efficient use of electricity. Far from it. Big gains can be made in other areas of the energy sector, with the hardest and most important being the transport sector. But I’m focussing on electricity today because that is your area of responsibility.

Investment in energy efficiency by some Trusts is happening. Over the last few years, the Hutt Mana Energy Trust and more recently, the Bay of Plenty Electricity Consumer Trust have together invested in excess of $1 million in residential energy saving projects. In addition, the WEL Energy Trust is funding an activity in Hamilton that is aimed at better understanding the energy consumption of the small energy consumer.

Some of your deeds are prescriptive in either requiring income to be returned to beneficiaries in the form of rebates, or to be allocated in a manner which maintains proportionality between expenditure on electricity and return to beneficiaries.

However, many Trust deeds allow much greater flexibility than this and many of you will find that your Trust deed does allow you to invest a proportion of the income you receive on energy efficiency projects. I encourage you to explore the options available to you.

I hope I have said enough to give you the direction of our thinking. The Government is looking for robust industry solutions to the undoubted problems in this industry. Where those solutions do not emerge, and this needs to happen very soon, then we will regulate.

Energy efficiency is back on the agenda in a major way and I urge you to look at what you can do to promote it and in doing so, deepen further your already excellent relationship that each of you have with your respective communities.

I think we still have too many very small line companies. There are savings to be made by the joining together of smaller line companies. Joint management contracts could be one innovative way to realise those savings.

Thank you for inviting me to speak.

I wish you a productive conference.


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