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Hodgson Speech To Major Electricity Users Group

SPEECH TO MAJOR ELECTRICITY USERS’ GROUP
27 APRIL 2000:
HON PETE HODGSON, MINISTER OF ENERGY


Mr Currie, ladies and gentlemen: good morning.

Thank you for inviting me to speak to you today.

The topics I intend to talk about this morning are items in which you have indicated an interest. First I will outline the changes we propose to make to the Commerce Act. I will briefly cover the role of the Electricity Inquiry and will outline the changes that we propose to make to the Electricity Information Disclosure Regulations. Finally I’ll give you an outline of my views on the Government’s energy policy including energy efficiency, climate change and where we should be heading.

MEUG has recently made representations to me seeking assurances that the fact that we have established an Electricity Inquiry would not hold up a re-vamp of the Commerce Act. I have given those assurances, which have now been confirmed by the release on 5 April by the Acting Minister of Commerce of details of the proposed changes to the Commerce Act. As you will be aware, I am not the Minister of Commerce and this therefore is not my portfolio. However, as we all know, the Commerce Act is of major importance to businesses in every sector particularly those who are major users of electricity.

I will therefore outline the key changes that we propose to make to the Commerce Act and discuss their possible impact on the electricity sector.

The key changes are to sections 36 and 47 of the Commerce Act, along with an increase in the penalties for offences and one or two other minor tightening-up improvements.

Section 36 of the Commerce Act aims to prevent dominant firms from using their market power to prevent or eliminate competition, while at the same time still allowing those dominant firms to compete. The government has decided that section 36 should be amended to change the threshold for this prohibition from persons who have a “dominant position” to persons who have a “substantial degree of power in the market”. This changed definition will line up our Act with the threshold in the Australian Trade Practices Act. The intent of the change is to increase the number of firms and markets subject to the scrutiny of this section.

Section 36 is a very important part of the pro-competition regime in the Commerce Act, particularly in supporting access to networks. However, while it may still have an important role in access to meters, the section is not of great significance for the electricity sector generally, because we have structural separation of the key natural monopoly or essential facilities parts of the industry, transmission and distribution lines. Because transmission and distribution are separated from contestable activities, they have little or no incentive to discriminate between users for access, or to cross-subsidise any retail activity, which could reduce or exclude competition.

The second major change to the Commerce Act relates to the mergers and acquisitions threshold. As the Commerce Act stands at present, it needs to be demonstrated that a single firm has dominance in the market in which it operates for a merger to be disallowed. The problem with the current situation is that it does not allow the Commerce Commission and the Courts to disallow a merger where high market power can be obtained without a single firm gaining a high market share.

An example of a proposed merger that would result in high market power but not high market share was the proposal by TransAlta to acquire a cornerstone shareholding in Contact Energy. A study commissioned by the then Ministry of Commerce indicated that, if that acquisition went ahead, wholesale electricity prices could be up to 5% higher on average over a five-year period. The existing rules in the Commerce Act meant that the Commerce Commission could not disallow the proposal. You will recall that, in the event, Edison Mission outbid TransAlta for the acquisition, so that particular policy issue did not arise.

However, in response to problems such as the TransAlta/Contact proposed merger, the Government has re-examined the merger threshold and has decided that it should be recast to allow scrutiny of all mergers that threaten economic detriment. The prohibition in section 47 will be changed to prevent mergers and business acquisition that will substantially lessen competition, unless the proposed merger would generate efficiency gains that would outweigh any anti-competitive detriment.

While it is not envisaged that a revised merger threshold will prevent a significant number of mergers each year, these changes to the Act will, in the future, allow a case like the proposed TransAlta acquisition of Contact to be scrutinised.

The third part of the revamp of the Commerce Act that will be of considerable interest to you is the proposed updating of the price control provisions of the Act.

You will recall that Max Bradford introduced a bill last year that would have placed electricity lines businesses under price control. That bill is now on hold. However, in addition to the clauses concerning electricity lines, the bill also contains some important provisions that will update the existing price control provisions in the Act. These proposed provisions would allow the Commission to use up-to-date approaches to price or revenue capping, including CPI-x or sliding scale, for any industry that might in the future be placed under price control.

Clearly we need to ensure these new generic sections are added to the Commerce Act. These provisions have already been considered by the Select Committee, they have been subject to public scrutiny and have widespread support. We will therefore not refer them back to the Select Committee, but will simply add them to the Commerce Amendment Bill when it has been reported back to Parliament.

Just a few words on the Electricity Inquiry. There isn’t much to say at this stage. As you know, the Inquiry held hearings in the main centres around the country in late March/early April and it is now into its deliberation phase. The Inquiry will be reporting to me in mid-June. The government intends to move as quickly as possible, once it receives the Inquiry report, in considering the report and then deciding upon appropriate action.

I would like to keep new legislation arising out of the Inquiry to a minimum. However, I do accept that it is likely that we will need new legislation. We intend to introduce any such legislation later this year.

I understand you are interested in hearing my views on what our policy objectives should be for electricity. I am not going to go into this in any great detail, prior to hearing from and considering the Inquiry report. However, in general terms I think the objectives are pretty straight forward.

People want to know that the electricity system is going to supply electricity when they turn on the switch. So we have to have a structure that ensures the generation, transmission and distribution systems will deliver.

Suppliers should offer the service quality customers want. For major users, you need to be able to contract for the level of reliability you need. Domestic consumers do not want black-outs or power surges that wreck their computers. And finally the price has to be as keen as we can make it.

I am informed that, when MEUG appeared before the Inquiry, you discussed with the panel the possibility of an electricity Ombudsman. You indicated to the panel that in MEUG’s view, an electricity Ombudsman should not also be an industry regulator.

I agree with you. There is no intention on my part for any industry Ombudsman to be a regulator. The role of an Ombudsman would be to investigate and resolve disputes between customers and electricity companies. Such a role would allow an Ombudsman to get a close-up look at industry practices and problems. The Ombudsman would therefore become an expert in the consumer/supplier interface and would therefore be well placed to identify problems with performance standards and deficiencies in practices. He or she would thus be able to make sure that the industry is fully aware of where it falls short so that it can raise its standard.

The Ombudsman would not become involved in setting prices or charges or in any other form of regulation. The roles of Ombudsman and regulator are clearly separate and there is no intention of an Ombudsman fulfilling a regulatory role.

A number of organisations have indicated their support for an electricity industry Ombudsman. That is encouraging. We need industry support for such a proposal before it can be progressed.

I now turn to an issue which I know is of great interest to you, that is the Electricity Information Disclosure Regulations. MEUG has written to me and to my officials expressing a strong desire to see improvement to the regulations proceeding as fast as possible. You will be pleased to note that officials are working on improving the regulations so that they fulfill their purpose for the analysts and consumers such as MEUG who need detailed information on line and transmission company activities.

As you will be aware the Ministry of Economic Development has recently written to your organisation and other interested parties on two topics. First, the Ministry issued a discussion paper earlier this year on ODV optimisation rules. The Ministry has now reviewed the comments received on that document and proposes new material which will strengthen the ODV rules. Proposed amendments to the ODV handbook were issued early this month for comments. I am sure this will be of great interest to you. Your comments will be of great interest to me.

A second item of significance is the Economic Valuation of line business networks as part of ODV valuations. If Economic Valuation is not required as part of the ODV approach, electricity line businesses can over-value assets and then make a normal rate of return on those over-valued assets. Because the valuation is too high, prices are excessive, but this is disguised by the over-valuation.

The problem with the Economic Valuation regime as it currently stands is that electricity line businesses can segment their tariff areas in a way which allows them to largely avoid using Economic Valuation. The Ministry of Economic Development has confirmed its view that the Economic Valuation approach is a useful one, but that segmentation practices need to be tightened. The Ministry has issued a discussion paper on this topic. In the paper the Ministry suggests an approach to dealing with the segmentation issue and has asked for submissions on the proposal.

As well as these policy issues my officials are also working on a number of technical amendments to the regulations for adoption for 1999/2000 disclosures.

Additionally, some further areas have been identified that could assist in improving the regulations. The Ministry is currently working on a discussion paper outlining these further possible changes. The plan is for this discussion paper to be released later this year, but this may be subject to the views of the Inquiry.

The information disclosure regulations required line businesses to disclose asset management plans for the first time this year. I am informed that all plans have been tabled by the deadline which was 31 March 2000. This is clearly an improvement on the last round of disclosures where one of the key characteristics was that many were submitted well past the deadline. Officials are now starting to evaluate the asset management plans to see whether they comply with the requirements set out in the Regulations. I am therefore not yet in a position to give any comment on this.

You will recall that, for last year’s disclosures, the Ministry rated the performance of the lines businesses, both in terms of timeliness and in terms of complying with the requirements of the regulations as generally poor. The Ministry issued a warning to the industry that this standard was unacceptable and must be improved.

The Ministry has, in its most recent newsletter, reminded line businesses that the next set of financial disclosures are required to be published by 31 August 2000. The industry has been warned that these disclosures must be published on time and the numerous errors which were a feature of last year’s disclosures must not be repeated. I have instructed the Ministry to take a firm line with electricity line businesses over this , including taking prosecutions where this is appropriate.

I think I have said enough on this topic for you to be assured that officials are continuing to work hard on improving the information disclosure regime to ensure that it achieves the government’s objectives in terms of providing accurate, timely and useful information.

A key area which is going to receive much greater attention and encouragement from this government than it has in the past is energy efficiency. Energy efficiency is at the heart of this government’s energy policy. It is one of those rare areas which can be a win for all parties with nobody losing out.

Electricity plays a major role for the members of your organisation in the operation of their businesses. I have no doubt that your companies have placed great emphasis on examining company energy use and on ensuring that this is as efficient as you can make it. Households and smaller commercial users may have fewer incentives and less ability than you to optimise their use of energy. This is one area where a government agency can play an important role in raising awareness and providing information.

So, for the country as a whole, improving the efficiency with which we use energy is of great importance. To assist in improving and promoting energy efficiency, the government has decided to support the passage into law of Jeanette Fitzsimons’ Energy Efficiency and Conservation Bill. We have negotiated some changes to the original Bill and a supplementary order paper to the Bill to give effect to those changes has been tabled in Parliament.

One of the key things that the new Bill will do is to require the Minister of Energy to prepare and publicly notify a draft national energy and conservation strategy by 1 December 2000. I am very supportive of this initiative because I believe it is going to be of assistance in promoting energy efficiency, because Kyoto is coming up behind us and because energy inefficiency has nothing going for it.

A Supplementary Order Paper to the Bill will also establish the Energy Efficiency and Conservation Authority (EECA) as a stand-alone Crown entity with primary policy and control responsibilities provided by the Ministry for the Environment. As you probably know, since EECA was set up in the early 1990s, it has been attached to the Ministry of Commerce, now the Ministry of Economic Development and has not been a stand-alone organisation.

The new status proposed for EECA will give it a clear governance system and a formal and permanent role within the state sector. This will help EECA to make its important contribution to improving energy efficiency in New Zealand and this in turn will contribute to our climate change policy.

Assuming the Kyoto Protocol comes into effect and is ratified by New Zealand, we will be committed to adopting policies to stabilise our greenhouse gas emissions at 1990 levels, on average, over the target period 2008-2012. The Protocol covers six gases. Countries can choose which gases to target. Countries will also have the ability to use international trading to help meet their target if suitable international mechanisms can be developed.

To reach this target New Zealand will have to reduce its “business as usual” emissions by approximately 34 million tonnes carbon dioxide-equivalent. This a 9% decrease on forecast business as usual emissions for 2008.

This is going to be a tough target for us to meet and we are going to have to take some hard decisions on how to achieve it. We are still working through these issues and I am not in a position to give you any clear signals yet. Suffice to say that this Government will be the administration that has to fill the policy vacuum, and that energy efficiency can play an important role in helping us to reach the goal.


So to sum up:
 we are proceeding with changes to the Commerce Act, which have recently been announced;
 we are continuing work on the information disclosure regulations, with some proposed amendments put out for comment and more to come;
 we are going to establish EECA as a stand-alone entity. Energy efficiency will play a major role in our energy policy;
 climate change targets are going to be difficult to meet. Energy efficiency can help us achieve those goals.

Thank you

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