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Address to Energy Trusts of New Zealand

Hon Pete Hodgson Speech Notes

[Address to Energy Trusts of NZ autumn conference, James Cook Hotel, Wellington]

Since I last addressed your Conference, in September 2000, the Government has introduced its Power Package electricity reforms and produced New Zealand’s first Energy Efficiency and Conservation Strategy. Both of these have important implications for energy trusts and I want to talk about them today.

First, however, a few words about the issue of the moment, which is the level of competition in the electricity industry.

I have become increasingly concerned in recent months that competition in the electricity industry is not what it should be. We have seen retailers declining to take on new customers, for various reasons, and there are worrying signs that regional monopolies or duopolies could be developing in parts of the country. The industry’s Market Surveillance Committee remarked last year that it believed the market is tending to oligopoly, which tends to dampen competition by limiting the scope for new entrants.

Effective competition is essential to the proper functioning of the electricity market. It is the discipline that ensures prices are fair. When prices are rising, as they are now, keen competition is particularly important for consumers. Without it we face the risk that prices will rise further than is justified.

In December, when I announced the findings of a review of the market’s performance last winter, I warned the electricity industry that the Government would look at further regulatory measures if the level of competition did not improve. Specifically I raised the possibility of measures such as the mandatory tendering of hedges and separation of retail and generation businesses.

On Wednesday I met the chief executives of the five major electricity generator-retailers to reinforce that message. We had a useful discussion in which they acknowledged that the current level of competition is insufficient and offered some explanations.

I am interested in their explanations of the current barriers to competition, but I am more interested in solutions.

Some of the answers may lie in adjustments to the transmission system. Reinsurance of dry-year risk may enable generators to make more hedge contracts available, which will be important for regional competition and new entrants to the retail market. And mandatory tendering of hedges remains on the table, with the results of some research on that option due to become available in a week or two.

Retailers’ behaviour is the basic issue, however. They assure me they are committed to competing vigorously, on as wide a front as possible. I am prepared to give them the benefit of the doubt, but not indefinitely. We will be meeting again in a few weeks, when I expect to hear in some detail how they will be increasing the availability of hedges, and of supply contracts for both the commercial and residential markets.

Meanwhile the industry continues to work on setting up the new self-governance arrangements required by the government. The establishment committee led by David Caygill has applied to the Commerce Commission for authorisation of the proposed new arrangements. This is a significant milestone.

The Commission has called for submissions and various parties are arguing their positions before the Commission and in public.

Consumers, for example, are looking to have greater powers to change rules. Transpower wants issues like grid security to be determined by government regulation, rather than as a contractual agreement through industry self-regulation.

Even if the rules are authorised by the Commission, there are suggestions that some parties may not sign up to them. I am not particularly surprised that a certain amount of positioning and even brinkmanship might be going on at this stage in the process. I still expect the industry to resolve the issues for itself, given the alternative of having the government step in to settle things by regulation.

A government requirement on which the industry has made significant progress, with the help of the Ministry of Consumer Affairs, is the establishment of the office of the Electricity Complaints Commissioner. But there is still some work required before the scheme can be counted a complete success, and I am most concerned that 10 trust-owned lines companies have not yet signed up. I do not know their reasons in any detail, but I urge them to get onside. The public, as well as the government, expects it.

As trusts you have some particular challenges in front of you during this period of transition for the industry.

The Government is looking to trusts to strengthen your accountability to beneficiaries. The Power Package charged trusts with developing a Code of Practice, providing for trust beneficiaries to have access to information, to attend trust meetings, and to have access to a complaints process for dealing with refusals to supply information or allow access to meetings.

As with the government’s other reforms, if trusts do not develop a solution that meets the government’s requirements then the Government will regulate. The Electricity Amendment Act 2001 gives me the power to regulate for a Code of Practice, as well as giving guidance on the government’s minimum requirements for an industry-designed scheme.

Many of you have communicated with me and the Ministry of Economic Development in recent weeks about your progress with this. I know that Energy Trusts of New Zealand, your national body, has been working on voluntary guidelines for trusts to apply in conjunction with their trust deeds.

I am pleased that your association has taken the lead in working on a suitable scheme. But I am concerned that in moving to implement the guidelines as quickly as possible, some important issues have been overlooked. I am also concerned that the work has been done without the involvement of trust beneficiaries or government.

In their current form, the guidelines do not meet government policy requirements. Your national body will be receiving a formal communication about this very shortly.

There is flexibility in how trusts can meet the requirements of government policy. I am not opposed to guidelines as such, so long as they achieve full coverage of trusts and deliver the improved accountability the government seeks.

There are eight areas that need further work.

First is consultation. It is not evident that trust beneficiaries have been consulted during the development of the guidelines, yet their views are important when the purpose is to promote greater trustee accountability to beneficiaries.

Second, the guidelines do not go far enough towards achieving the government’s policy requirements. There are no rules, for example, specifying how trusts should respond to requests for information, make decisions on those requests, and provide the information.

Third, there is no provision for an executive body with national oversight of the operation of the guidelines. For me to assess whether trusts are complying with the guidelines, or whether a regulated code of practice is necessary, I need the executive body to provide an overview of what is happening with all the trusts.

Fourth, the internal complaints procedure provided for in the guidelines does not meet recognised standard benchmarks, such as those set out in the Government Policy Statement for the Electricity Complaints Commissioner scheme. These relate to issues of accessibility, fairness, efficiency and accountability. The guidelines should also include a review process for complaints that have not been satisfactorily resolved by an individual trust.

Fifth, the guidelines provide that the auditor of each trust will monitor the application of the guidelines and compliance with them. This is not a normal function of financial auditors. And if trusts are individually monitored, the process will need to be co-ordinated nationally to ensure consistency of methodology and reporting.

Sixth, there is no set frequency for reviewing the guidelines – and although the guidelines state trusts will be consulted as part of the review process, there is no commitment to consult trust beneficiaries.

Seventh, there should be a requirement in the guidelines for trusts to promote them. Trust beneficiaries need to be made aware of the guidelines’ existence and availability. I know of one trust that has taken the initiative in sending out a pamphlet to all its beneficiaries and putting its code of practice on its website, and I would like to see that kind of openness practiced universally.

Eighth and last, a process needs to be worked through for signing all energy trusts up to the guidelines or getting their agreement to sign up in the near future.

I know that self-regulation is not a straightforward task and I am committed to offering as much assistance as possible. Officials at the Ministry of Economic development are available to help you work through the necessary improvements and achieve the best possible guidelines. If you decide you do not need Ministry’s help, I ask that you keep officials informed so they can provide feedback and advise me of your progress.

The Government remains keen to use self-regulatory mechanisms and industry solutions where possible in the electricity industry. But this does not mean industry will get away with diluting government policy.

I recommend you use your best efforts to develop your own response to the government’s requirements for greater trust accountability. The alternative is government regulation – and you should be well aware that if a Code of Practice is regulated you will lose significant flexibility and control over the terms of your accountability to beneficiaries.

Two other accountability matters arise for you from the Electricity Amendment Act 2001, namely the new provisions for financial reporting and for beneficiaries to appoint an auditor at a trust’s annual beneficiary meeting.

The change in the required standard of energy trust financial reporting is significant. Trustees must prepare financial statements in accordance with generally accepted accounting practices, which means consolidated financial statements with full information on the finances of the lines company. This is an important advance that will enable both beneficiaries and trustees to examine the trust’s financial position more thoroughly.

I understand some trusts are considering accepting a qualified audit report rather than complying with this requirement. This would not be an acceptable response in the government’s view – nor, I expect, in the view of your beneficiaries.

With regard to the new power for beneficiaries rather than trustees to appoint the trust’s auditor, I know some process questions have been raised by trusts with the Ministry. Officials are available to help where possible and are communicating with trusts to help ensure their full compliance. But it must be understood that neither their assistance, nor any from my office, can include giving legal advice or official approval for a particular course of action. Trusts need their own legal advice on whether a proposed auditor appointment process complies with the legislation.

I have raised a number of points of difference between trusts and the government, but there are many positive developments in the relationship as well. So I want to close by acknowledging the excellent work that a number of trusts are doing to promote energy efficiency.

Trusts will play an important role in achieving the goals of the National Energy Efficiency and Conservation Strategy, either in partnership with Government or on their own account.

One of those goals is to improve the quality of the New Zealand housing stock. In particular we need to look at houses built before 1977, when the building code requirements for ceiling insulation came into effect. As many as 700,000 houses in New Zealand - that’s 60 percent of them - are under-insulated or not insulated at all.

As a result many New Zealand families and elderly live in cold, damp, draughty homes, which are unhealthy as well as uncomfortable. These families are paying for heating that is escaping through the ceiling, floor, walls and pipes – and in many cases they are paying avoidable medical bills as well.

Such homes can be vastly improved with ‘healthy housing’ insulation retrofits at a cost of about $1700 or less.

Even disregarding the comfort and health benefits, the economic benefits are compelling. In Christchurch, for instance, a typical retrofit will pay back in three years from energy savings.

It is a big ask, however, to retrofit so many houses, even if we do it over 10 – 20 years. Government can and will contribute, with EECA already having put money to this end. But the ‘make or break’ contributions will come from groups such as you, working with and supporting the residents in your areas.

I want to congratulate the growing number of trusts committed to improving energy efficiency in their communities. Last time I spoke to you I mentioned the Eastern Bay Energy Trust, the Hutt Mana Energy Trust, and the WEL Energy Trust for their substantial investments. I’m pleased to add the Taranaki Energy Trust and the Hawkes Bay Consumer Trust to the list of those showing leadership in this area, and I know a number of others are also considering healthy housing or energy efficiency initiatives.

Energy efficiency programmes are an ideal way to recycle the revenue you gain from generations of community investment in electricity infrastructure. EECA can help design your projects and I urge you to make use of the authority’s resources. It is currently developing proposals for grant funding for the coming financial year and is keen to form partnerships with trusts and other funders.

EECA is also interested in other creative projects to foster energy efficiency in your community, for example by helping local businesses and schools and fostering public education. Trusts have the resources and the ability to identify local priorities that will make such projects work. Expect to be contacted by EECA in the next few weeks to explore specific opportunities.

Trusts have a challenging year ahead. Be assured though that I am committed to working those challenges with you to get the best results for consumers. I know that matters to you as much as it does to me.


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