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Hodgson Speech: Address To Grey Power AGM

Wednesday, 10 April 2002 Speech Notes

Power To The Consumer

[Address to Grey Power AGM, Canterbury University, Christchurch]

Good afternoon ladies and gentlemen. It is a pleasure to be here and I thank you for your invitation. I was delighted to receive it because Grey Power members have been expressing their concern to me in writing and I relish the opportunity to tell you what’s been happening from my end.

Electricity matters to members of Grey Power for two simple reasons. The first is that you can’t do without it – none of us can. The second is that the turmoil over the past four or five years has not left you feeling that you are better off. On the contrary, many will want to know when all this change and uncertainty will stop.

In addition to that, Grey Power membership includes a number of people who are pretty wised up on electricity issues. They might have been engineers, hydro workers, or just people with long and accurate memories.

I too have had a long interest in electricity matters, though as a 51 year old my memory is necessarily shorter than yours. Since my twenties I have been involved as an observer or commentator, and later as an opposition spokesperson. For the past two years I have been Minister. I want to tell you what I have been up to.

I started off by defining what the Government wanted from the electricity sector. We said that electricity prices should be fair, that electricity supply should be secure and that the system should be environmentally sustainable. In other words, we shouldn’t muck up the environment, the lights should stay on and the monthly bills had to be affordable.

There are immediate contradictions with those aims. For example, California discovered a year or two ago that if prices are kept too low, the lights go out because no-one bothers to build new generation. So managing any nation’s electricity system always involves a question of balance.

At the time of the last election our Government inherited an electricity sector that was in turmoil. It was a shambles and some of that shambles persists to this day, as I shall outline.

Politicians cannot continually blame their predecessors. I am now the Minister of Energy, not Mr Bradford. It is my responsibility, not his. That said, his time as Minister of Energy was not a happy one, either for the industry or the public. He took a series of decisions that had two characteristics. The first is that they were irreversible, or mostly irreversible. The second is that they were wrong, or mostly wrong.

By the time of the last election, ECNZ had been split up and partly sold. The generation assets of many communities, including my own, had also been sold, forcibly. Decades of community effort were struck down. People were, understandably, angry.

In addition to that, the new players in the industry did not have their systems running properly. People couldn’t switch electricity companies for love nor money. Lines companies were operating as natural monopolies with no price regulation.

There was some suggestion of hydro water being spilt to influence prices and electricity retailers had discovered the value, for them, of high fixed charges.

Electricity retailers were buying one another’s customers, to the concern of the customers who were being bought and sold. Some retailers were offering two- or three-year price freezes in an effort to allay concerns.

Still, to the credit of those who run the industry, the lights stayed on. A series of mild, wet winters helped. The notable failure, of course, was central Auckland where some large underground cables blew, with serious consequences.

So that’s the recent history. It sets the context. What has happened since?

Well, for starters, customer switching is now a whole lot easier. There are still some exceptions, but most New Zealanders can now switch companies without trouble. Electricity companies who muck up switching can now be fined for their mistakes. New Zealanders switch companies more than any nation in the world.

For the natural monopoly parts of the industry, the lines companies, we have now passed legislation that means a badly performing lines company can be subject to a price inquiry, followed by price control. I have given this power to the Commerce Commission because it has the skills to do the job.

The Commission has just completed another task I set it, which was to check up on all line companies’ asset valuations. These valuations are important because they directly influence line charges. If a lines company over-inflates its asset value, it can over-inflate its profit requirement and therefore its prices.

Last Thursday the Commission announced that it had finished checking the valuations of the country’s 29 lines companies and approved 27 of them. Five companies made a material reduction in their valuations to secure that approval. One of those reduced its valuation by $22 million. The two companies whose valuations have not been approved – Buller Electricity and Eastland Network – now face further scrutiny from the Commission.

Altogether the valuation of the country’s lines companies was reduced by $45 million, or one percent. The good news in those numbers is that we now have it on the Commerce Commission’s authority that lines companies — most of them — have not been manipulating their valuations to gouge profits, as has sometimes been claimed.

That is not the end of the story, because the Commission is now looking at whether the valuation method currently in use for lines companies is the appropriate one. It is also developing the performance criteria it will use to judge whether a lines company should be subject to a price inquiry and price control.

All of this takes time, and it should take time. Hasty judgements only lead to mistakes and to court cases, which create even more delay and expense.

So progress may be slower than you or I would wish, but lines companies are improving their efficiency. Line charges are generally steady. In fact the average line charge for a residential customer is almost exactly what it was in April 1998, according to the Ministry of Economic Development. A PriceWaterhouseCoopers report released last week showed line charges dropped slightly on average in the year to March 2001 and the report’s author predicts this year’s figures will show a further fall.

Another development is the passage of new law giving me the power to make companies report their hydro spill – when, how much and why. I haven’t had to regulate for that because instead I challenged companies to come up with their own rules and they have. Now all hydrological data is in the public arena and there are plenty of people in society who know how to analyse it.

Some hydro spill is, of course, unavoidable. Any decent flood will see to that. But I am now satisfied that spilling hydro water to push up price is no longer a risk. Indeed, the only instance where I’m sure it happened was for about three months, three and a half years ago. It is, of course, an utterly unacceptable practice for both environmental and economic reasons.

Another improvement this Government decided the electricity industry needed was a watchdog, a sort of ombudsman. The previous Government thought this unnecessary. But we now have new legislation that gives me the authority to establish such an office. Again, I told the industry that if they did it themselves, to our standards, I wouldn’t need to regulate.

They have. The Electricity Complaints Commissioner has been at work since late last year. The office is utterly independent and, as reports emerge, both you and I will be able to see the trends. The Commissioner has the power to both promote and require a settlement of a complaint.

Those are some areas of progress that make a difference in favour of consumers. There is another, of particular importance to this audience, concerning low fixed charges. But I will come to that in a minute.

First I want to mention two important issues on which I am not satisfied that we have made enough progress. They are energy price rises and the level of competition in the system.

Let me start by giving you two surprising facts.

The first is that we have the cheapest electricity in the developed world. The second is that since last winter domestic electricity prices have so far gone up on average by about 3%.

The first fact, that we have the cheapest electricity in the world, does not mean we should rest on our laurels. Affordable electricity comes our way because of our hydro-electricity heritage. We should never squander it.

The second fact, that the average domestic electricity price has risen by a little over 3%, will not satisfy those of you who live in areas where electricity has risen by a great deal more that that – eight percent, or 18 percent, or whatever.

But the truth is that in many areas of the country, the price hasn’t risen at all. That is why the average increase is so low.

So, have energy price rises been justified? Please excuse the politician in me but the answer is both yes and no.

It is yes in some cases because the two or three year price freeze I mentioned earlier has been lifted, and generally the regions that have seen the highest increases are those where prices have been frozen the longest.

It is yes because prices are moving to what economists call the long run marginal price, which is the price that will enable power companies to build new power stations. Those stations will not be built unless their owners can contract to sell the power at a price that pays for their construction. And of course if they are not built, then sooner or later the lights go out.

But the answer is also no: recent price rises cannot be justified without reservation.

It is no because there is not enough competition. It is no because too many New Zealanders have too little choice in who they buy their electricity from – which means they can’t be sure they are paying a fair price.

Let me give you another surprising fact. Of the 43 lines company areas in the country, 19 have only two energy companies vying for new residential customers and five have only one.

That is not real competition. People in those areas are vulnerable to monopoly or duopoly pricing and that’s not good enough.

I have told the major retailers that if they want to keep the competitive market model for electricity, they had better compete. They have undertaken to operate in a greater range of areas and I have asked them to record their intentions in writing so that I can judge whether the competitive model is indeed working.

If I’m not satisfied, I can get the power to regulate to force generators to put a proportion of their electricity out to tender. That creates an opening for a new retailer to enter an area where there is limited competition, increasing choice and the prospect of competitive prices for consumers.

I have been talking of competition and the competitive model. But many of you are well aware that there are other models.

Many of us may look back fondly to the integrated electricity system we used to have. We bought our power off local companies, mostly owned by trusts or local bodies. Most of the country’s generation plant was owned by the Government and operated by one organisation.

That system kept the lights on and delivered us most of the electricity infrastructure we have today. We should be grateful for those achievements, but we should not forget that the centralised state-run system had its failings too.

It produced both surpluses and shortages in electricity supply, including the 1992 hydro crisis – which was worse than last year’s, even though last year was drier. It produced the horrendous cost overruns of the Clyde Dam, a classic example of how to milk the taxpayer. It produced the price hikes of the seventies, one of which was a nationwide increase of 40 percent. Many of you will remember it.

So we should not be too quick to think that winding the clock back would fix everything that is frustrating us with the electricity system we have now. In particular, Government can’t just regulate prices down to where we might all like them to be. If we did, then sooner or later the lights would go out.

We must also accept that many of the changes made by the previous government are effectively irreversible — that we couldn’t go back, even if we wanted to. I am talking about changes such as the corporatisation of the industry, the split of electricity line companies from electricity retail and the sale of Contact Energy.

It would cost more than $2 billion to repurchase Contact at its current market capitalisation. Similarly, as a Dunedin ratepayer, I cannot expect the Dunedin City Council to buy back our local generation scheme at Waipori and Lake Mahinerangi. These assets will not return to public ownership.

On the other hand you can be very sure that so long as this Government lasts, no more state-owned assets will be sold and neither will any community be pressured to sell their assets. On the contrary, we have changed Mr Bradford’s law so that locally owned lines companies can again build and own their own generation, within limits, if they want to.

My job is to take the system this Government has inherited and make it work for all of us. That is what this Government’s policies are designed to achieve.

I have left till last the single most important improvement we are making in the interests of older consumers, and that is the introduction of a low fixed charge option.

My next door neighbours in Dunedin happen to be in six pensioner units. Until recently, they would tell me over the fence that the fixed charges in their electricity bills were higher than the variable charges, especially in summer. That meant that if they saved electricity they hardly noticed any change in their power bill.

“What’s fair about that?” they would ask. Answer: nothing.

High fixed charges don’t serve the customer, which is what a competitive electricity market is supposed to do. If someone wants to put in a log burner, or improve their insulation, they should see the results in their power bill. High fixed charges mean the power bill drops hardly at all.

This is particularly important for New Zealand’s half a million senior citizens. Older New Zealanders use energy very carefully. Whether it’s because of fixed incomes, the experiences of the depression and the war, or just because there aren’t often kids around to leave the heater on and the door open, older New Zealanders are frugal, sometimes to a fault.

Older New Zealanders responded magnificently to last winter’s electricity savings campaign and now is as good a time as any for me to say thank you for your contribution.

But such frugality, or common sense, should be rewarded. For that reason, the Government has decided that every New Zealander should have the option of a low fixed charge tariff. We have said that such a charge should be no more than 10% of the average electricity bill – in practice, about 30 cents a day plus GST.

I am very pleased to advise you that we are making very good progress on that. It hasn’t been easy. First we had to change the way that lines companies charged retailers, because lines companies were more often than not the source of the high fixed charge.

A lot of effort and talking has gone into this and on a couple of occasions so has a direct threat of regulation. But we are now getting there.

Low fixed charges are accompanied, of course, by higher variable charges. But we have designed the policy so that anyone using less that the average household consumption, typically less than 8000 units a year, will be better off with a low fixed charge.

As of April 1 this year, 99.6 percent of New Zealanders will have access to a low fixed charge.

It is likely that the vast majority of Grey Power members will benefit from choosing a low fixed charge tariff. I urge your association to give this development a high profile. That is probably the single most effective thing you can do in your members’ interests as far as electricity is concerned. It is high time we publicised this option widely and I look forward to your assistance.

You should note that the low fixed charge tariff is an option and customers will not automatically be placed on it. Grey Power members would be well advised to call their power company to find out whether they will benefit from moving to the low fixed charge tariff.

Remember too that it can be very much in your interests to switch supplier. I am aware that Grey Power has been advising its members not to switch, because of past problems. But as I mentioned earlier the companies have cleaned up their act significantly, so it is time to reconsider.

Switching is the way to exercise your power as consumers and make the system work in your favour. It is the risk of losing customers that puts the pressure on retailers to improve their service and keep prices as low as possible. They now have the Electricity Complaints Commissioner keeping an eye on their switching procedures as well. So if you can get a cheaper price from a competing company, by all means take it.

Information on price comparisons for competing electricity retailers in your area is available from the Consumers’ Institute Consumer PowerSwitch website, and by free phone from the Citizens Advice Bureau. I recommend that you take advantage of these services. They can save you money.

I have spoken for long enough, although there is much that I have missed out – energy efficiency, marketing issues, how power bills are designed, the future for renewable energy, the outlook for this winter, what new generation is likely and when. I have also missed out a lot of regional detail, such as what is going on the Horowhenua, Wairarapa, Wanganui, Buller, Christchurch or wherever.

Your President will decide how long we have for questions or comments – he has an AGM to run. But I’m hoping to stay on to meet with individuals or regions who have a question, criticism or comment, and I understand you have made a side room available for the purpose.

Thank you for the opportunity to address you and thank you for your attention.

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