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Electricity reform: progress and network issues

Hon Pete Hodgson
Monday 29 October 2001 Speech Notes


Electricity reform: progress and network issues

[Address to the Electricity Networks Association of New Zealand annual general meeting, Te Papa, Wellington]

Thank you for inviting me to speak today.

When I addressed your annual general meeting last year I spoke about the Government’s Power Package of electricity reforms and the challenges that created for the network industry.

The last twelve months has been very eventful. But then in my experience every year is eventful for the electricity industry.

Sometimes, some of you must wish for a quieter time. My guess, though, is that one of the attractions of working in the electricity sector is that it’s never dull.

Over the past year, the industry has gone through the growing pains of progressing industry self-governance. Steady and hard-won progress has been made, albeit at a rather slower pace than I would like.

At the same time, the industry and its institutions have been subject to the stresses of an exceptionally dry year. It has come through that challenge largely intact, though not without damage to some market participants.

I’ll talk a bit more later about the issues raised by our experience this winter, as well as about several other issues of interest to you.

But first, I’d like to make a few remarks about fixed charges. This is an issue that’s important to me, and one that network companies are directly involved in.

Fixed Charges

Let me begin by reminding you about the Government’s overall objective for the electricity industry. It is to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all classes of consumer.

Sometimes these are competing goals, so we must be careful to balance them appropriately.

You will all be aware of the Government’s policy on fixed charges.

The Government Policy Statement requires all retailers to offer a low fixed charge tariff option to domestic consumers – that is, a fixed charge less than or equal to 10 percent of the bill of the average domestic consumer.

For domestic consumers that means less than about 30 cents per day.

Although the requirement is expressed as an obligation on retailers, distributors must also ensure that their own charges assist retailers in complying with the policy.

In practice, this means that distributors’ fixed charges must be considerably less than 30 cents per day.

A fixed charge from the distributor of around 15 cents per day would generally allow retailers to recover billing and call centre costs via their own fixed charge without breaching the 30 cents per day limit.

I understand that in some cases retailers are offering a low fixed charge option, but very few customers have taken it up. But this is often because customers are not aware of its existence.

One of the requirements on retailers is to advertise their low fixed charge tariff so that consumers who can benefit from it are able to take it up. So far that isn’t happening consistently and officials are monitoring retailers’ advertising as part of the overall monitoring of compliance.

I am pleased that most distribution companies are now offering an appropriately low fixed charge. I understand that some more will be introducing pricing changes within the next few days, and I look forward to seeing those changes come into effect.

But the latest information I have from officials shows that three distribution companies have not responded to the Government’s requirements.

Those companies should be on notice that my patience is running thin. I believe I am entitled to give notice. The Government Policy Statement is now almost one year old. The Electricity Amendment Act 2001 was passed three months ago. I am now able to regulate.

The industry should be aware that if fixed charges are regulated you will lose a significant amount of control over your own pricing methodology. It’s your call, but I suggest you act quickly. It would be a pity if regulations have to be introduced just to deal with a few recalcitrants.

I do not want to regulate. But if I must, I will. And once I take a decision to regulate, I will not reverse it.

Some distribution companies have moved partly or significantly towards low fixed charges, but still fall short of full compliance. Some of the problems are of a technical nature. My officials are communicating with those companies and they will be required to move very promptly to full compliance.

I don’t want to leave this subject on a negative note. The large majority of the industry have moved promptly, on request, without regulation, without fuss or fanfare, to meet the low fixed charge requirement. Thank you for your responsiveness and co-operation.

Winter Review

A review of the events of this winter is now well under way.

The prospect of electricity supply shortages was a potent reminder of New Zealand's heavy reliance on hydroelectricity and consequent vulnerability to dry years.

The review is designed to examine, amongst other things, the effectiveness of existing market arrangements during the winter and whether any further changes should be made.

Those of you who have read the submissions to the review will have seen that they tend to fall into two distinct camps.

There are those who think that the market and market institutions worked just fine, and that any problems experienced over winter were brought about by poor risk management decisions by some parties.

On the other hand, there are those who maintain that there are serious flaws in the current structure of the industry and the market, and that radical surgery is required.

I don’t yet have a firm view. What I am sure about is that the market would have performed better and with less trauma had the reforms in the Government Policy Statement, like demand side participation and greater transparency, been fully implemented.

With Cabinet, I will need to make decisions on whether changes additional to those required by the Government Policy Statement are needed to improve the market and deliver the Government’s overall objectives in electricity. I expect to announce those decisions before Christmas.

Now to the state of play with the reform process.

EGEP

While I have been concerned about the pace of progress, there is no doubt that the Electricity Governance Establishment Project has come a long way in the last year.

I want to acknowledge the hard work of the Establishment Committee and those assisting it. Thanks also for the contributions made by this Association and its members.

One example is the work on model Use of System Agreements.

Once the Electricity Governance Board is established, it will have responsibility for developing model Use of System Agreements, and I’m sure it will find the work of this Association to be invaluable.

I understand work is also under way on model approaches to distribution pricing.

New Zealand electricity consumers will benefit from the hard work put in so far. But it is important that the industry continues to work hard on making the new arrangements a success. I would be concerned about any further slippage in the timetable.

The alternative to the new arrangements is not the existing arrangements; it is regulation. If the EGEP approach fails to get industry support, I will have no option but to establish a Crown entity Electricity Governance Board and rules in a wide range of areas.

I believe that the contractual approach and industry self-governance have important advantages over regulation. Contractual arrangements are likely to be more flexible and responsive than a regulatory approach. It is also quite likely to be cheaper.

Unlike the issue of low fixed charges, I am not signalling that my patience is running out. There is plenty of hard work going on and plenty of good will. But I am gently reminding you that progress must continue. If the industry stalls I will have to act, however reluctantly.

Complaints Commission

I am glad the industry has at last made some progress on establishing an Electricity Complaints Commission.

An independent chair has now been appointed along with consumer and industry representatives. The Commissioner is likely to be appointed before Christmas.

Many but not all line companies have signed up to the scheme, and I urge all those who have not signed to do so as soon as possible.

Again, the choice is to handle the scheme through contractual arrangements and industry self-governance or to have it imposed by regulation.

Trees Regulations

Your Association has asked for an update on progress with the Electricity (Hazards from Trees) Regulations, generally referred to as the trees regulations.

Currently there is no legislative regime that clearly explains the rights and responsibilities of tree and line owners.

The current draft regulations address this by providing for specified clearance distances between trees and lines, and for a series of notices from line owners to landowners. Separate rights and obligations are specified depending on whether landowners declare an interest in the trees.

Landowner and forest owner organisations still have significant concerns about the draft regulations, however.

You will remember that land access and trees issues were discussed at length during submissions on the Electricity Industry Bill. Now that the Bill has been enacted, I am focussing on what further work is needed to clarify the rights and responsibilities of tree and line owners.

I have asked my officials to report to me by Christmas on the options available to me to make progress this issue. I can assure you that the concerns of all stakeholders, including line companies, will be considered, and that there will be further consultation before any changes are made.

Rating Powers

Another topic of particular interest to you at the moment is the power of local authorities to levy rates based on a valuation of line network assets.

Following a Court of Appeal decision in 1998, the option of levying rates on network assets is a matter for each local authority. At present I understand that the Auckland City Council is the only local authority to do so.

In developing the Local Government (Rating) Bill, and, the Government decided not to alter the status quo.

The select committee considering the Bill has received submissions on this issue and they will be considered carefully. The committee’s report to Parliament is due on November 15 and no doubt many of you will be reading it closely.

Renewable Generation

Finally I want to mention the new possibilities that have opened up for line companies to invest in generation.

By amending the Electricity Industry Reform Act the Government has eased the constraints on ownership of generation by line companies, including allowing more investment in new renewable generation plant.

Although there are restrictions on ownership of hydro and geothermal plant, it is now possible for a line company to own other new renewables including solar and wind generation without size limits. The only requirement is that cross-subsidisation from the lines business is avoided.

This opens up a range of new options for supplying power to remote areas and for relieving network constraints. I hope you will consider the new options available to you, especially in light of the increased competitiveness of renewable energy sources that is likely to follow from ratification of the Kyoto protocol on climate change.

Thank you again for the opportunity to address your AGM today.

The electricity industry has confronted its biggest test this year since the wholesale market was introduced. I think most if not all of you would acknowledge that the New Zealand public is still a long way from being convinced that it is being well served.

That is a problem for all of us. But I am determined to keep working with the industry, as far as I am able, to ensure that New Zealanders get the electricity system they deserve – one that is efficient, fair, reliable and environmentally sustainable. Nothing less is going to be tolerated by the people to whom both you and I are accountable.

ends

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