Prebble: Why Energy Regulation Won't Work
Friday 18th Jun 1999
Speech -- Economy
SPEECH TO ELECTRICITY ENGINEERS ASSOCIATION CONFERENCE
Sheraton Hotel Auckland 10.00am Friday 18th June 1999
Thank you for the invitation to speak and to give my views on the electricity reforms.
First, let me set out my credentials. I am the first Minister of State Owned Enterprises. On my wall I have the cheque for Electricorp when it was set up.
I quickly decided that just corporatising the state electricity generators was not sufficient. One needed to look at distribution, so I set up Transpower and began the process of reforming the large number of small electricity boards. Lest people's memories fail them, the local electricity boards were featherbedded, inefficient and very wasteful.
I was retired before I completed the job of re-structuring. The team I set up under Dr Troughton went to Victoria and used what they had learnt in New Zealand. The Victorian reforms have seen a truly massive improvement in productivity and a substantial reduction in prices of up to 40 percent.
Here in New Zealand we have gone off the rails in the electricity reforms.
There are basically two models. There is the Victorian model, where they have applied a CPI minus x price control from day one. Those who have bought in have known about the regulation and so have priced accordingly.
The second model is what is known world-wide as the New Zealand model. The New Zealand model is light-handed regulation. It relies on competition and the efficiencies to be gained from free enterprise. This model says that all regulations in the end are self-defeating. Only competition guarantees innovation and efficiency.
The New Zealand model also says that the line energy split is artificial. Unless energy companies also own lines, managers are deprived of the ability to use resources to their maximum efficiency.
If splitting line from energy companies is correct, then why not split Telecom or the railways? In Europe they have split rail companies from the railway line companies. The efficiency gains have been minor compared to the gains that Tranzrail has made. I think this example is worth me exploring with you.
In railways, roughly every 20 kilometres per hour increase in speed means a doubling of the cost of the track - you need a more substantial track to cope with faster speeds. So Tranzrail has kept open so called uneconomic lines, like the one to Gisborne, by lowering track speed.
In Europe it's the track companies that set line speeds and so indirectly run the rail companies. Passenger services are given priority, so destroying Europe's freight business. The decisions on investments in Europe in rail are not rational.
So too with Telecom. Management needs to control the lines to make rational decisions over things like fibre optics.
If you don't control the line company, how can you make rational decisions over where to situate new generating capacity? Line companies, just like rail line companies, have no incentives to reduce costs or to be efficient.
What the Hon Max Bradford has done is a sort of hybrid between the European and the New Zealand model. We do not have the benefits of either model and we have the down sides of both. Either he should go the whole way or he should admit he was wrong and unwind.
I believe he should unravel the line company split and force the community trusts to divest themselves. An open competitive electricity system is the best way to get lower electricity costs. Privatisation will bring far more benefits than state regulation.
I would also force Transpower to divest itself of some of its capacity, so as to have some competition.
ACT wrote to Mr Bradford last year and said that his proposed reforms were fundamentally flawed. Now we are being asked to support a system of price control which we do not believe will work. Price control over time never works. Now ACT holds the balance of power in Parliament, some seem to expect that we will forget our principles and support bad law.
Frankly, the proposed regulation won't work. The Government has got it wrong and until they admit that, it will never be able to work.
For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at firstname.lastname@example.org.