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The Power Package - Pete Hodgson Speech

Hon Pete Hodgson
Thursday, 9 November 2000, 3.30pm, Te Papa, Wellington. Speech Notes

The Power Package: implications for the electricity network industry


(Address to the Annual General Meeting of the Electricity Networks Association)

Thank you for inviting me to speak today.

I would like to take this opportunity to discuss the challenge laid down to the industry by the Government’s Power Package announced on 3 October. I will talk about the expectations in the Government Policy Statement, particularly the issues facing lines companies. I'll also discuss upcoming legislation and the stricter controls on lines companies to be administered by the Commerce Commission.

The Government has acted because New Zealanders deserve a better deal from the electricity industry. They deserve an efficient, fair, reliable and environmentally sustainable supply of electricity.

The poorly implemented reforms of the previous Government have damaged the reputation of the industry. People feel frustrated and powerless. Service is often poor. High fixed charges hurt the most vulnerable members of society. The time has come to sort out this mess.

The Power Package is a strategic and comprehensive approach to electricity reform, with two main aims. The first is to deliver fairness to all consumers, particularly small consumers. The second is to promote environmental sustainability and energy efficiency.

The Caygill Inquiry’s message of self-governance has been adopted as a centre-piece of the Government’s electricity policy. One of the strengths of the self-regulatory framework is that it provides the flexibility for the industry to keep up with future changes and advances in technology.

I have said many times that the Government favours industry solutions where possible and regulatory solutions where necessary. The challenge to the industry is to work together to achieve the outcomes that the people of New Zealand deserve. This is an achievable, but it will require dedication and hard work.

I have confidence in the electricity industry. In the past you have demonstrated your ability to think innovatively and act quickly, and I know that many of you are willing to think in terms of social responsibility.

The stakes are high for all of us – for consumers, for the industry and for the Government. The alternative to self-governance is regulation, and the costs of regulation to industry participants would be considerable.

I expect to see, in the near future, signs of significant progress towards the establishment of an Electricity Governance Board. I was pleased to hear recently from Richard Rowley, Chair of the Electricity Chief Executives Forum, about progress towards the unification of MARIA, NZEM and MACQS. Clearly this is an important step along the road to a comprehensive centralised governance structure.

But there are many other issues to be progressed as well. These include important matters of direct interest to lines companies, such as a consumer complaints resolution scheme, tariffs with low fixed charges, establishing terms and conditions for connection of distributed generation, and agreeing model use of system agreements and pricing methodologies.

I strongly urge you to keep your focus on the Government Policy Statement that was released in draft with the Power Package papers on 3 October and will be released in final form before the end of the year.

The possibility of industry self-regulation depends on the industry’s achievements in meeting the Government’s expectations. The Policy Statement sets out the details of those expectations and for that reason it is an extremely important document.

Some of you have responded to a call for submissions on the draft Policy Statement. Thank you for those submissions. Officials are analysing them and will report to me shortly. The Policy Statement will be finalised by Cabinet before the end of the year, but please note that I do not expect to be making major changes to the draft. We are fine tuning it.

There are many issues in the Policy Statement of interest to this Association, but let me pick on two of them.

The first issue is one I am very pleased to see you picking up on today. It is the development of a consumer complaints resolution procedure, including the establishment of an Ombudsman or similar scheme. I note that you asked Fiona McLeod, the Victorian Energy Ombudsman, to speak to you today. Clearly you have recognised that the creation of an Ombudsman is not just a retail issue. You would be wise to ensure that your voice is heard during the discussions on Ombudsman issues.

There is also the issue of the level of fixed retail charges. This is one of the most important issues facing electricity consumers today. Many New Zealanders have written to me expressing their concerns about fixed charges. They will have written to you too.

The Government expects all retailers to offer at least one tariff to domestic consumers with a low fixed charge - likely to be around 30 cents per day. This policy will deliver fairness to the most vulnerable members of society and will encourage energy efficiency.

A number of retailers have written to me pointing out that fixed line charges from distribution companies are often higher than this level, meaning that retailers may make a loss on sales to small domestic consumers.

My response to this is while the Government has expressed its expectations in terms of the retail tariffs paid by consumers, it is up to the industry as a whole to make it work. This may involve distribution companies re-arranging their own tariff structures to ensure that meaningful competition can take place for small domestic consumers.

Distribution companies have the opportunity to focus on the fixed charge issue through two measures covered in the Government Policy Statement. Those are the model pricing methodologies and the model use of system agreements.

It is important that retailers and line companies communicate effectively on this issue. If the industry cannot agree to a workable solution, the Government will create its own solution by regulation. This may need to involve regulating lines companies as well as retailers. It is clearly in your interests to work closely with retailers to avoid this.

I have spoken to you about the challenge of self-regulation and the opportunities it offers. But I would also like you to be very clear about the alternative. Officials are working hard to draft legislation. The legislation will be introduced to Parliament before the end of the year and will give the Government power to introduce its own solutions. I have no doubt that you would find those solutions much less palatable than self-governance.

The legislative powers fall into two broad categories.

There are targeted powers to address any specific failings of the industry or the Board to meet the Government's expectations. These powers will be quite extensive and relate to:
* fixed charges;
* the consumer complaints resolution system, including an industry code of practice setting standards for both distributors and retailers in relation to domestic consumers;
* customer switching;
* pre-payment meters;
* transition arrangements in the event of a retailer becoming insolvent;
* connection of distributed generation to distribution lines;
* disclosure of information about hydro spill and hedge prices; and
* a code of practice for trust beneficiaries’ rights to information and meetings.

The second broad category of power will let the Government remedy any comprehensive failure by the industry to establish an effective Governance Board that delivers on the Government's objectives. In this event, the Government would establish the board as a Crown entity, with members appointed by me.

I can give no assurance that members would be chosen in accordance with the industry’s preferences. The Board would have the power to make recommendations in relation to regulations or rules applying to industry participants. I would have the power to direct the Board to carry out particular functions or to give effect to particular policies. Funding to cover the operating expenses of the Board would be met by a levy on industry participants.

The legislation containing these powers will go through the normal select committee procedure, probably early next year. You will have the opportunity to make full submissions.

It is very important for the industry to get its act together before the select committee considers the Bill. If the committee perceives that the industry cannot agree on key issues, questions will be raised about the whole self-governance framework. Let’s try to avoid that. I am sure you do not want any lack of progress towards self-governance, or industry shortcomings in meeting the Government’s objectives, to be a key focus of the select committee.

I expect that the Bill will become law some time in autumn next year. I don’t propose to steam-roll this legislation through Parliament.

While the Inquiry recommended self-regulation for the industry in general, it also recommended that lines companies be subject to stricter controls, including targeted price control. Government policy follows the Inquiry’s recommendations closely in this area and the legislation will implement those policies.

The legislation introduces very significant changes for the Commerce Commission, which Commission will be given four additional areas of responsibility.

Firstly, the Commission will administer a targeted price control regime for lines companies. This will involve setting and publishing thresholds for the declaration of price control. The Commission will be able to use incentive-based methods of control such as CPI-X. I am pleased to see the Commission preparing for its new role by initiating an inquiry into electricity line business pricing.

Secondly, the Commission will administer the information disclosure regime, which will continue to be an important part of the regulatory regime. The public will continue to have an interest in the activities and performance of all lines companies, not just those under price control.

The third new area of responsibility for the Commission relates to ODVs. Because asset values are such an important component in evaluating the performance of line companies, the Commission will carry out a nation-wide re-calibration of asset values using the ODV methodology.

The new ODV handbook I released as part of the Power Package was subject to careful consultation with the Commission as well as the industry, and should form a suitable basis for the re-calibration. The Commission will also be required to review whether ODV is the most appropriate valuation methodology.

Fourthly, the Commission will be involved in determining Transpower’s pricing methodology if the Governance Board and Transpower are unable to agree on that.

I'm sure John Belgrave covered these issues in more detail in his speech after lunch.

Funding for the Commission to carry out these new roles will be by levy. The details are currently under consideration.

I am very aware that many New Zealanders have not seen benefits from the electricity reforms introduced by the previous administration. The industry has spent a lot of effort recovering from those reforms. This Government believes the industry has the ability to deliver better service to consumers. Even in the area of natural monopoly lines, there will be scope for an efficient lines business to operate successfully without being placed under price control by the Commission.

That said, I want to finish with some thanks to individual companies and to the
Association itself. Only a year ago, relationships between the then Government and the industry were poor indeed. The reasons are both obvious and nowadays irrelevant. They are history.

The new Government has a new style. I think we are a lot more open, a lot less judgemental and a lot more determined to put the needs of customers ahead of ideology and bluster.

But that new style has required your industry to change behaviours too. You know that the Government has created a healthy tension on purpose, and you know that you have to keep moving to stay ahead of us.

I would like to thank and congratulate you on your progress to date. I also ask you not to slacken your efforts, as there is plenty more to be done.

Thank you.

ENDS

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