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A Fair Deal For Electricity Consumers

A Fair Deal For Electricity Consumers

Media Release and Speech Notes

The Government today announced a comprehensive policy package designed to deliver fairness and transparency for electricity consumers.

The Power Package puts the heat on the electricity industry, says Minister of Energy Pete Hodgson.

"This package will sort out the mess left by the previous Government and give consumers the deal they deserve", Mr Hodgson said.

Today's announcement follows the Caygill Inquiry into the Electricity Industry. The Inquiry's recommendations have been accepted, either directly or in a modified form.

"The Government’s objective is to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all consumers," Mr Hodgson said. "Our approach is industry solutions where possible and regulatory solutions where necessary."

A Government ‘Energy Policy Framework’ statement released today sets out the Government’s overall energy policy objectives and summarises the relevant policies and programmes.

A draft Government Policy Statement sets out in detail the Government’s views on electricity industry governance and its expectations for the industry.

"The Government Policy Statement begins with a set of clear guiding principles and covers the establishment of an Electricity Governance Board. The board will have a chair independent of the electricity companies and a majority of independent members, appointed after consultation with the Minister of Energy. The Statement sets out a considerable work programme covering all sectors of the industry – wholesale, transmission, distribution and retail.

"The Government expects the industry to move quickly to implement these measures. The threat of regulatory intervention if the industry does not deliver is real. Legislation will be introduced before the end of the year giving the Government powers to regulate if necessary."

Tight monitoring and reporting arrangements will be put in place to ensure the outcomes sought by the Government are being met effectively.

Mr Hodgson said the Commerce Commission would regulate prices in the monopoly part of the industry: line companies and Transpower. Individual companies will be placed under price control if they break thresholds or criteria set by the Commission.

"Because of the significance of line asset values for the price consumers pay for their power, the Commerce Commission will also undertake a one-off re-calculation of distribution and transmission asset valuations. The Commission may choose the methodology for this revaluation – ODV is one option."

Other initiatives to protect the interests of electricity consumers include:
 requiring all retailers who supply domestic customers to offer at least one tariff package with a fixed charge of no more than 10 per cent of the bill of the average domestic consumer;
 establishing an electricity ombudsman or similar independent system for the resolution of consumer complaints;
 amending the Consumer Guarantees Act to cover electricity;
 requiring the Electricity Governance Board to develop a model domestic consumer contract with specified minimum features including availability of pre-payment meters at a reasonable cost; and
 providing for fines for breaches of rules relating to key consumer issues such as billing and disconnection.

Mr Hodgson said the Power Package also contained many initiatives to benefit the environment and energy efficiency.

"Energy efficiency will be promoted by the limits on fixed charges. The Governance Board will be required to ensure that its rules promote demand-side participation in the wholesale market. Introduction of real-time wholesale pricing will enable retailers and large consumers to see and respond immediately to market prices.

"New requirements for hydro generators to release information on spill will help ensure that CO2 emissions are minimised. Investment in environmentally sound generation will be encouraged by requiring that market rules facilitate new technologies, use of renewable energy sources and distributed generation. The ownership separation constraints in the Electricity Industry Reform Act will be relaxed to permit line businesses to increase their involvement in distributed generation, including use of new renewable generation technologies.

A summary of the Government’s decisions is attached. Further attachments set out in more detail the benefits to consumers and the environment, and a full list of proposed legislative amendments.

Hon Pete Hodgson Speech

The Power Package

Opening remarks on the release of the Power Package – the Government's response to the report of the Caygill Inquiry into the electricity industry.

Delivered 3.00pm, Beehive Theatrette, Parliament.

Today I am announcing a comprehensive series of measures to shape the future of the electricity sector.

The changes we're making have two aims.

The first is to deliver fairness to all consumers, particularly small consumers.

The second is to promote environmental sustainability and energy efficiency.

The Government’s overall objective is to ensure that electricity is delivered in a fair, efficient, reliable and environmentally sustainable manner to all consumers.

Consumers have been mucked around badly. Many people feel frustrated and powerless. Service is often poor. Commercial customers have done alright out of recent changes to the industry, but competition has not done enough for small consumers.

We are making changes to ensure New Zealanders have an electricity industry they can trust to give them fair value for their money.

Our approach has been to look for industry solutions where possible and regulation where necessary. That way we maintain a sense of industry ownership of industry issues on one hand, and certainty and protection for consumers on the other.

Since the election I have repeatedly invited the industry to keep ahead of Government and find their own solutions. I gave the industry our timeline and challenged them to beat it. In some areas they have. In some they haven't, and in others they can’t.

Today the Government is giving the industry a clear message about what more they need to do, and the standards we expect. That detail is in a Government Policy Statement, a near-final draft of which I am releasing today.

A new Electricity Governance Board will be responsible for carrying out many of the changes. It will have a chairperson and a majority of members independent of the electricity companies.

Later this year I will introduce legislation containing wide-ranging backstop regulatory powers. That means everything the Government is asking the industry to do, I will be able to do myself as Minister of Energy - if I have to.

My hope is that I will not have to use those regulatory powers. My hope is that they will sit there, unused, for ever. But if the industry does not deliver, I will use them.

There are some areas where industry self-regulation coupled with backstop regulation won't or can't work, and we must regulate directly.

Lines companies are natural monopolies. Throughout the developed world it is accepted that monopoly power must be regulated. The only question is how.

We are introducing targeted price control for lines companies and for the national grid operator, Transpower.

The Commerce Commission will identify inefficient line companies and cap their prices. It will be able to force them to cut their prices if that is warranted.

The Commission will be able to use the CPI minus x method of price control, which is accepted internationally as an effective method.

CPI is the rate of consumer price inflation and x is a number chosen by the regulator. If x is the same as inflation, the effect is a nominal price freeze. If it is greater, the effect is a price cut.

There will be opportunities to have a decision by the Commission reviewed by the High Court, but they will be strictly limited. Lines companies will not be able to go to Court and stay there.

Price control will mean consumers can have much more confidence that the price they are paying for electricity is fair.

But this package is about much more than price control. We are fixing a whole lot of things in the electricity industry to get a better deal for consumers and the environment.

We are requiring every retailer to offer at least one set of tariffs with a fixed charge of no more than ten percent of the bill of an average consumer. I will invite the select committee dealing with the legislation to consider details of that regulatory design.

Every retailer will have to offer this low fixed charge option to every credit-worthy customer that approaches them for service.

Companies will not be able to refuse to supply small consumers, as some have begun to do.

We are requiring the industry to develop rules ensuring all major retailers offer pre-payment meters to consumers who want them, at reasonable cost.

We are introducing an Electricity Ombudsman, or a similar consumer complaints system, so people have somewhere to go when they feel they are being treated unfairly.

The industry will work with the Ministry of Consumer Affairs on the design of the complaints system. The industry will also pay for it.

We are providing for fines to be imposed on companies breaching market rules relating to key consumer issues such as billing and disconnection.

The first fines for breaches of switching rules have already been levied, and this will continue.

There is a new requirement for the industry to draw up a model contract for domestic consumers. It will be developed with help from the Ministry of Consumer Affairs and consumer representatives and it will cover things like billing frequency, dispute resolution and outages - all of which have caused headaches for many domestic consumers.

We are introducing a new requirement for the industry to draw up rules for an orderly transition in the event of a retailer going bust. People's lights should not go out if their supplier goes out of business.

The rules for valuing line company assets are being tightened. A new valuation rulebook is being released today.

Because valuations are an important factor in line company prices, the Commerce Commission will do a one-off recalculation of all line company asset valuations.

The Commission will also be able to fine tune or completely change the standard valuation method, known as ODV, if it decides that is warranted. Responsibility for the information disclosure regime, which has also been tightened recently, passes to the Commerce Commission as well.

The Government is sending a clear signal to line companies that it expects any changes in rural line charges to stay in line with urban line charges. We will be monitoring them closely to check that that happens.

We are bringing electricity under the Consumer Guarantees Act. Electricity company customers will have the same guarantees of quality as the buyers of other goods and services, and the same rights of redress from companies that do not deliver.

Monitoring of the new Electricity Governance Board is important. The Board will report to me every two months during the set-up period and I intend to make those reports public.

Every year the Auditor-General and the Parliamentary Commissioner for the Environment will monitor and evaluate progress and compliance with the Government Policy Statement, and report to Parliament.

There are other important changes to the governance of the industry, including trusts, and moves to give consumers better information. But I want to close by mentioning a few of the benefits for energy efficiency and the environment.

In designing this package we secured gains in energy efficiency wherever the opportunity arose.

The option of lower fixed charges empowers consumers to save real money through energy efficiency.

The introduction of a real time market will mean that demand side bidding can at last grow in the wholesale market. That means power users will be better able to adjust their use according to prices and reduce peak demand.

We are making it much easier for small generators to connect to distribution networks. That will encourage the spread of small efficient power sources like fuel cells and cogeneration, which will replace large hydro and thermal plants like PCs replaced mainframes.

Reopening the option for mirror trusts and raising the generation limit for lines companies will mean many small projects can now get off the ground. In the case of new renewables, to be defined in legislation, there will be no limits on new generation.

From now on all hydro spill will be reported every three months, so that analysts can discern whether avoidable spill ever occurs. From now on future hedge prices will be amalgamated and released, so that analysts can better plan supply side or demand side investment.

There is a lot of detail in this package. It is comprehensive, wide-ranging and carefully balanced. That is the main difference from the upheaval the last Government created.

We are turning up the heat on the electricity industry.

We are bringing fairness back into pricing and we are looking far ahead to shape an industry that is environmentally sustainable.

More than anything we are setting out to give power back to consumers, which is why we call it the Power Package.

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