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Sowry Address To Electricty Industry Reform Conf.

Sowry Address To Electricty Industry Reform Conference

Hon Roger Sowry MP
National Party Energy Spokesman

31 May 2004

Address To Electricty Industry Reform Conference

Thank you for the opportunity to be with you today. The energy sector, as always it seems, faces some interesting challenges. With the challenge of dealing with the Commerce Commission's new rules, the Electricity Commission coming into place, and the challenge of the new Electricity and Gas Industries Bill, the industry is operating in interesting times.

The issues surrounding the electricity sector are relatively clear. As identified in the Price Waterhouse Coopers Infrastructure Stock take released two weeks ago, the key issues are:

- Fuel supply uncertainty

- The impact of the Electricity Commission

- The introduction of carbon taxes

- Emissions; and

- Transmission.

To this, I would add two other key points:

- The Resource Management Act challenges; and

- The challenge of obtaining and maintaining water rights.

A secure energy supply is absolutely crucial for economic growth, with the reliability of supply a very important factor in business investment decisions. Shortages can therefore have lasting effects on the rate of economic growth - meaning that last year's scare probably had a much deeper negative impact than just the short-term production losses that were experienced.

Our total demand for energy has increased by around 20% over the last decade. Even if there are significant gains made in energy efficiency, we can be certain that the strong increases in demand will be on-going as our economy expands. With the earlier-than-expected rundown of Maui, it is therefore surprising that more investment in new electricity generation is not in the offing.

I have heard many and varied reasons for this, - with two of them, RMA consent problems and the lack of a government leadership, being the most common, and I believe the most critical issues, to be addressed.

Even the relatively new darling of the Minister of Energy, wind, is facing increasing difficulty in getting to market.

Wind generation is most likely to be developed on remote sites, the romantic appeal of wind turbines seems to have worn off, which leads to extra infrastructure costs, such as roading, transmission and communication consents adding costs and delays to future projects.

The Government appears to be actively discouraging investment in some generation, particularly coal generation, with its often talked about but unspecified carbon tax. The consequences of discouraging coal generation need to be debated urgently.

National has already announced our policy, which is to repeal any carbon tax, thereby signalling our view that investment in coal generation is a serious option.

Since 1998 when the vertical separation was imposed on lines companies with an exception of up to 5 megawatts, we have seen further changes to lines companies operation.

In 2000, the Caygill inquiry recommended the exception be increased to 5% of network maximum demand or 5 megawatts, whichever was the greater and applied to any generation capacity.

This was changed during the legislative process with the Electricity Reform Act 2001 being passed allowing for 5 megawatts and 2% of maximum demand, plus unlimited generation by renewables, but all carried out in a separate company.

The current proposal before the select committee in the Electricity and Gas Industries Bill 2003 is for lines companies to be enabled to generate 25 megawatts or up to 10% of maximum demand again with this to be held in a separate company.

I am not going to rehash the arguments that led us to today's situation of lines companies being excluded from the generation business. However, the situation we face today in New Zealand, with the high possibility of generation shortages and the new regulatory environment surrounding the operation of lines companies, is significantly different from the situation we faced in 1998.

As I see it, with the strict regulatory environment now in place covering the operation of lines companies, New Zealand can ill afford to be denied the potential of additional investment and competition in generation that they offer.

National has already announced that we will support lines companies being able to enter in generation, with no limit on the amount of generation they may own - subject to a continuation of the rules currently separating the lines business.

Issues of regulatory or access terms and conditions will need to be examined and monitored so as to ensure a distribution service could not raise barriers to entry for other generators.

Clearly, moves to open up the ability of lines companies to enter into the generation market will mean that the issue of lines companies being able to re-enter the retail market will also need to be re-examined.

Allowing total vertical integration is an issue that I intend to examine over the next few months, as I do wonder if we will see significant growth in generation by lines companies without allowing re-entry into retail as well.

Prior to the current restrictions being introduced in 1998, lines companies were significant generators owning 1,100 MW of generation - 740 MW of which was constructed in the 1990s.

In coming to a decision to allow the re-introduction of lines companies into the generation business, the National Caucus has also taken the time to look at the reasons for the restriction enforced in 1998, and the consequences of continuing with that restriction.

I believe there is the likelihood that if the current restrictions continue, then lines companies will look to invest in the electricity sector offshore, and that they may look at investing in non-core businesses in New Zealand.

It seems to us to lack commonsense to have investment capital move to offshore generation projects, or away from generation altogether, when we face a very real crisis and the need for far greater investment in generation in New Zealand.

One other issue I wish to canvass today is the reason that National is opposing the current Electricity and Gas Industries Bill, which establishes the Electricity Commission.

We are concerned that the design of the Commission is faulty - being that it requires the Commission to carry out too many roles, that effectively make the Commission both the judge and jury.

It is also both a referee and a player. The Commission violates basic principles of good governance of Crown entities by mixing conflicting functions that do not belong in one organisation. It also ignores accepted practices for charging fees to an industry for services provided by government.

We are also opposed to the power of the Minister to direct the Commission's workload, and to the Minister being able to ignore or change the Commission's determinations.

Indeed the structure opens up the door to political meddling. And we are concerned that the Bill gives effectively too much power to Transpower, who can now focus on convincing the Commission or Minister of their course of action, without having to concern themselves with lines companies' views, when the lines companies have to pick up the cost.

Recent events, such as the cancellation of Project Aqua, and the constant delays to the upgrading of important infrastructure such as roading, clearly highlight the problems with the RMA. Most worrying for the electricity sector, and lines companies in particular, are the concerns voiced by Transpower in their recent half-yearly report.

Transpower raised concerns about the consistency of application of the Act by various local bodies, and the inability of the Act to currently take into account issues of national importance.

You have to have some sympathy for Transpower. They will have to negotiate consents the length and breadth of New Zealand, with thousands of landowners and dozens of local authorities.

National will ensure the rights of property owners are balanced with the need for reasonable access to maintain and upgrade lines infrastructure.

The Government has announced, belatedly, a review of the RMA. But given the Green politics influencing the Government, I have no faith this review will lead to changes in the Resource Management Act that will stop vexatious actions or speed up consents.

National will shortly be announcing our proposals for changes to the RMA to allow for the infrastructural investment we need in New Zealand.

Even before Transpower can start the process of applying for the necessary resource consents to upgrade the lines, decisions have to be taken on the transmission pricing methodology, who is going to pay for new investment.

The growing debate about the level to which the grid is upgraded needs to be resolved quickly.

Finally, National's full energy policy will be released later in the year; but three points which we have announced already include:

* the promise to repeal any carbon tax

* a review of the RMA to encourage infrastructural investment

* and to allow lines companies to re-enter the generation business.

These will all be part of a plan to encourage more generation and show the leadership in the energy sector that New Zealand needs.

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