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Hodgson: Electricity issues for lines companies

Hodgson Speech: Electricity issues for lines companies and trusts

[Pete Hodgson Speech: Address to the Energy Trusts of New Zealand 2004 AGM, James Cook Hotel, Wellington]

Thank you for the invitation to address your AGM and Conference. I think that it is a couple of years since I last addressed you, and much has happened since then.

Today I mainly want to address a number of issues that your executive indicated you would like to hear about from me.

But first some general comments on the state of the electricity sector, and in particular the developments of the past 12 months.

This time last year all possibilities of electricity industry self-governance working had just about gone. That led to something of a watershed year for the sector. Obviously the major milestone was the establishment of the Electricity Commission last September. I’m pleased with the calibre of the Commissioners and the way in which they have devoted themselves to the daunting task of getting up and running.

The Rule Book is in place and the new market arrangements got underway without a hitch on 1 March. The Commission has appointed very experienced staff, with the ability to hire in any additional expertise needed to address the wide range of issues that they face.

A further, important, chapter of the Rule book, Part F, dealing with transmission issues, was gazetted last week.

The amended version of the Government Policy Statement will be the document that gives the Electricity Commission its riding instructions, so to speak. It will define the Commission’s key tasks of ensuring that new Zealand’s electricity supply is secure, establishing processes for making decisions on investment in the national grid, improving demand-side participation in the wholesale market and enhancing consumer protection measures. The draft GPS, released last year, is being finalised at present and should be available shortly.

Not everybody will agree with us on all aspects of the detail, but I’m convinced that we’ve now got the basic policy settings for the industry right. There will, of course, be a need for fine tuning as the Commission gets up to speed and starts to grapple with its very sizeable workload, but that’s only to be expected with such a major change to the structure of the market.

I am also confident that we have a good framework in place to ensure security of electricity supply. We have had two dry years recently. We can’t stop dry years, but we can put in place measures to minimise disruption from them.

Electricity plays a huge part in modern society. This demands very high levels reliability so that there will be no disruption to our daily life - or to industry and commerce and the many social services upon which we all rely.

One of the issues I have been asked to address is the call from trusts and lines companies for the lifting of restrictions on the ability of lines companies and trusts to invest in electricity generation and retail.

In essence this is a call for the repeal of most of the Electricity Industry Reform Act introduced by the previous Government. This issue is becoming a subject of quite considerable debate, and I am happy to take the opportunity today to comment.

Before discussing this issue I need to clarify a point over which there appears to be some confusion – lines companies are already able to retail the electricity that they generate.

I also want to emphasise that the Government has progressively increased the ability of lines companies and trusts to invest in generation and retail activities – both in the 2001 amendment to the Electricity Industry Reform Act and more recently in the 2003 Bill.

At the moment they are allowed to generate and retail up to 2 percent of maximum demand or 5 MW, whichever is the greater. The Electricity and Gas Industries Bill, currently before Parliament, increases these levels to 10% or 25 MW.

The Select Committee is presently considering the levels in the Bill and I am open to suggestions from the Select Committee for increasing the threshold even further.

It is suggested that the current regime has outlived its usefulness and that it is timely to allow re-integration by means of appropriate amendments to the current Bill.

Some good arguments have been put forward, but even if I fully agreed with them it would not be appropriate for a major change of this nature to the current industry structure to be made without full consideration and consultation on the issues involved.

You will agree that full and fair opportunities for widespread consultation must be made available so that the considerable range of parties with an interest in this can be heard. This would mean that passage of the Bill would have to be put on hold. There is, however, too much of the new Electricity Commission regime, particularly regarding security of supply, dependent on passage of the Bill for it to be delayed.

Let me outline just some of the issues that would need to be carefully looked at before any decisions could be made.

There is a residual risk of cross-subsidy from captive lines customers to retailing activities. While this risk is considerably reduced under the Commerce Commission’s thresholds regime, the regime is still very new and not yet fully tested. No lines companies have been controlled yet.

There is a risk that lines companies may have incentives to create difficulties for competing local distributed generation, especially where the lines company had the intention of investing in similar local generation itself. Furthermore, a potential new-entrant generating company would need to reveal commercially confidential plans to the lines company – a possible competitor.

If lines companies were permitted unfettered investment in generation and retail operations, logically generation and retail companies would have to be given the ability to invest in lines activities. This may result in vertically integrated regional companies with considerable market power across generation, lines and retailing activities.

Finally, if a lines company that was permitted to retail electricity simply purchased the customer base of an existing retailer, there might be little real improvement in competition. A lot of money would change hands, and the bankers, lawyers and consultants would do well, but consumers wouldn’t see any benefit. It might therefore be necessary to prohibit lines companies from purchasing existing customer bases, and require them to compete for customers against existing retailers.

These are just some of the issues that need to be worked through before we can contemplate a full return to vertical integration of the industry.

In the meantime we are seeing some improvement in retail competition, with Contact Energy recently announcing that they are to expand their retail activities to cover the whole country.

That will mean New Zealand has two nation-wide electricity retailers, with most regions having at least a third choice of retailer available. This is good news for consumers and I think it shows that the retail market is starting to stabilise and mature.

Turning now to another issue I was asked to talk on, I know your association is keen to have input into the work of the Electricity Commission. I understand you have taken this up with the Commission and that, of course, is a matter for the Commission to contemplate.

I am however sure the Commission will welcome your contribution presenting the views of the lines company shareholders that most of you represent. Indeed the Commission wants to see the widest possible contribution to its work.

I note that you have also suggested to the Commission the formation of an additional advisory group – namely, a Consumers’ Advisory Group, and that ETNZ should be represented on that Group. Again, I will leave that to the Commission to contemplate.

This does, however, raise a question in my mind as to whether trusts with substantial investments in lines companies can truly act as consumer advocates. I know that this is not a new issue. Indeed it arose at the time of the EGEC referendum when trusts applied for consumer votes and some were allocated them.

I raise this issue in passing because the need for ETNZ to have input into the Electricity Commission’s work was on your list of issues for me to address. I leave this thought with you for further consideration and debate.

The need for greater transparency of power accounts has also been raised. It is suggested that this would logically be achieved by explicitly separating the various component items of the accounts.

I have always agreed that this would be a useful measure. I had thought that this could be achieved voluntarily by the industry without the Government having to regulate. The Government Policy Statement, first issued in December 2000, contains a request to the industry to implement this voluntarily. In the event industry self-governance failed and now it is the turn of the Electricity Commission to implement this policy.

I would like to think that the Commission will be able to do so without the need for regulation. However I am taking no chances. At present I have no powers to regulate for such a requirement, but I have included in the Electricity and Gas Industries Bill, presently before Parliament, a power to make regulations providing for the provision of information on customer accounts. If necessary I will be able to use those powers to see this policy introduced.

Two years ago when I addressed your autumn conference I talked at some length about progress by your association with the development of guidelines for access to information by beneficiaries of electricity trusts. You will all know that this was one of the measures in the Government’s October 2000 Power Package of Reforms.

I want to take this opportunity to reiterate the Government’s commitment to this initiative for trusts to strengthen accountability to your beneficiaries.

The purpose of the guidelines is to ensure that clear and transparent protocols are in place 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.

I had hoped to be able today to congratulate you on the successful completion of this project. I know that your executive was also keen for that to be the case. As it is I understand the guidelines are almost, but not quite complete.

I believe that the only outstanding issue now is who should undertake the role of reviewer, should a beneficiary wish to seek a review of any trust’s decision relating to the provision of information. I am aware that discussions are progressing with the Electricity Complaints Commission about the Commissioner taking on this role. That seems to me to be a sensible idea and I hope your discussions are successful.

In the meantime I understand that your association will be recommending to this conference that the guidelines be formally adopted with an interim arrangement for a reviewer and that they will be amended once discussions with the Electricity Complaints Commission are completed.

I know that your executive has worked closely with my officials in developing the guidelines and that the resulting document, though three years in gestation, is a very good outcome for trust beneficiaries. On that basis I am happy to congratulate you on the (almost) successful completion of the guidelines.

One final comment on the guidelines, though. Community consultation is a very important part of any initiatives like this that promote consumer and beneficiary interests. I urge you to consider your guidelines to be “draft” guidelines until such time as individual trusts have taken them to their beneficiaries and sought, and considered, any feedback.

My final points today concern energy efficiency and conservation, distributed generation and low fixed charges.

New Zealand is only just beginning to pay serious attention to energy efficiency.

When this Government updated the Building Code in 2000 to raise the energy efficiency standards, it was the first time this had been done since 1977.

When we introduced the National Energy Efficiency and Conservation Strategy in September 2001, it was the first such strategy in New Zealand's history.

The minimum energy performance standards for electrical goods and machinery that we began to introduce in 2002 are also the first we've had.

We must make further improvements in the nation's energy efficiency, because we simply can't sustain growth that is accompanied by relentless demand for new sources of energy.

Relentless demand puts relentless upward pressure on prices. The only way we can ease that pressure is to have an efficient level of investment in technologies and practices that moderate demand.

Every time we succeed in doing more with less, we delay by another fraction the need for expensive new energy infrastructure. As well as easing the pressure on prices, that increases our energy security.

I note some enthusiasm from trusts for increased Government funding for interest-free loans for insulating existing homes.

The 2004/05 round of EnergyWise Home Grants, administered by EECA, is now in gear and applications close shortly. These grants help pay for insulation so that communities can enjoy warmer and drier homes, better health - and less costly heating bills. Community groups, trusts and businesses interested in running a community insulation project for 30 or more homes should talk to EECA about the possibility of co-funding it with an EnergyWise Home Grant.

Trusts also have major role to play in this essential thrust towards improved energy efficiency. When I have spoken to you in the past, I have acknowledged the excellent work that some energy trusts have been doing in supporting the goals of the National Energy Efficiency and Conservation Strategy, either in partnership with the Government or on their own account.

As I noted, and it’s still very true, retrofitting so many existing houses with adequate insulation is a huge ask. The Government is continuing to contribute through EECA, but the “make or break” contributions will come from groups such as you, working with and supporting the residents in your areas.

I am disappointed to note, therefore, that over the past 12 months only three trusts have been active in making significant contributions to this work. I urge you to take a hard look at your efforts to date, and think about what more you can do over the next few years. This is an opportunity to deliver real benefits to the consumers you represent.

You will be aware of the discussion paper on Distributed Generation issued last year. The submissions are now receiving their final review and I am expecting that regulations will be issued by August.

You will also be aware of the Government’s Low Fixed Charge tariff policy, which is intended to assist low-use consumers and encourage energy conservation. Monitoring of the industry has indicated that while lines companies and most retailers have moved towards voluntary compliance with the policy, others have yet to pick up the ball.

The drafting of regulations is now in hand. These will require all electricity providers to have a low fixed charge tariff available to domestic consumers. Consultation on the wording will follow, and I expect that the regulations will be in place by July.

Trusts have generally supported the low fixed charge policy to date on a voluntary basis and I thank you for that. It is important to have your support both in the setting of tariffs and also in determining customer rebates – thus ensuring that those on the low fixed charge tariff are not penalised.

In the past, rebates by some trusts have subverted the intent of the low fixed charge policy by offering differential rebates depending on whether or not a customer is on a low fixed charge policy.

Thank you for inviting me to address your conference. Like all participants in the energy sector, trusts have a challenging time ahead. Your strategic direction discussion document provides a challenging range of objectives for you to focus on. I wish you well for the remainder of your conference and the time ahead.

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