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Electricity retail competition is flourishing

AUCKLAND SUB-CENTRE
OF THE
INSTITUTION OF ELECTRICAL ENGINEERS (IEE)


An Address delivered on behalf of

Hon Max Bradford
Minister for Enterprise and Commerce
Minister for Tertiary Education
Enterprise and Innovation Ministerial Team Leader
Breakfast Meeting
Ellerslie Convention Centre, Auckland
7.30 am,1 September 1999


Good morning, and thank you for inviting me to speak today.
Your invitation gave me broad license to speak about “some aspect of the power industry in New Zealand.” The aspect I’d like to focus on is competition.

Electricity retail competition is flourishing

When you look at the electricity industry in New Zealand today, it’s hard to believe how far we’ve come in such a short time.

The Electricity Industry Reform Act came into force just 14 months ago. The past 14 months have been a period of unprecedented change for the industry.
Separating the ownership of line and supply businesses has unleashed forces of competition which had been kept in check even after power companies were put on a more commercial footing and deregulated in the early 90s.

Before ownership separation, retail competition was a non-event.

The Energy Companies Act, which set out to commercialise the electricity industry, was introduced in 1992. Six years after the starter’s gun went off, competition was still in the starting blocks.
The Government had to act.

This Government stands for competition in business, free of Government meddling, but our patience with the electricity industry ran out.



In April 1998, when the shape of the reforms was announced, something like 10 percent of consumers could switch power companies.

Now, over 60 percent of consumers have the choice and chance to get competitively lower power prices.

Now, 14 months on, competition is flourishing.

Let’s take the Ellerslie Convention Centre for example. This building - like all the other buildings in this area - is hooked up to Vector’s network. If you go into the Consumers Institute PowerSwitch website (http://www.consumer.org.nz/), or call PowerSwitch’s 0900 number (0900 769-370), you’ll find that consumers supplied via the Vector network have a choice of 5 retailers. 5 retailers. And if you have a time-of-use meter, you may find one or two more knocking on your door.

What’s more, switching from one retailer to another should be simple, and cost little or nothing.

Compare that to the situation 18 months ago. Frankly, there is no comparison.
To be fair, Auckland consumers have greater choice than most. As you’d expect in a competitive market, the greatest competitive activity occurs around large users and large concentrations of users.

But competition does not stop at the Bombay Hills. And you don’t have to be a 200,000 kilowatt-hour a year consumer to have a choice of supplier.
Look at Marlborough, for example, where newcomer Meridian competes with Trustpower, which bought the separated retail business from the incumbent power company.

Marlborough is a quite different area in many respects from highly urbanised, densely populated Auckland. It has a relatively high proportion of rural consumers, and few of the big energy users that proliferate in Penrose and other parts of Auckland. Despite that, consumers in Marlborough have a choice of retailer.

One of the reasons for my optimism is the dynamic state of the electricity retail industry. A significant new retailer was launched last month. Fresh Start is beginning its bid for business across Powerco’s network in Taranaki, Wanganui and Wairarapa. Once they gain a foothold, I expect they will follow the example of other retailers and cast their net wider.

Fresh Start will not be the last retailer to enter the market.

There are areas where head-to-head competition has not emerged, but competition is spreading and I expect that all areas will benefit soon.

We are seeing innovative marketing strategies like Meridian’s link with Sky Television to offer discounted Sky subscriptions. If you join up to Sky, you can opt to have your electricity supplied by Meridian anywhere in the country. In a limited sense, then, almost everyone in the country has a choice of electricity supplier, even if Meridian is offering to match consumers’ best deal current electricity prices.

But if we only think of competition as two or more retailers competing for consumers who are connected to a particular network, we miss a whole dimension of competition.

Something that’s particularly pleasing for me is that the development of competition is not just about retailer push. There are examples of consumer pull as well.

I’m talking about the trend for businesses with operations in many parts of the country to buy electricity from one supplier. New Zealand Dairy Group, for example, has cut a deal with First Electric that is earning up to 15% savings for over 9000 dairy farmers in the Waikato and Bay of Plenty.

The best-known of the consumer groups is “The Power Club” – a joint venture between Federated Farmers and The Energy Group Limited to earn savings of up to 10 percent on bills.

These examples of developing retail competition are not exhaustive. Nor are they the end of the story. Remember all this has happened since around April this year. It’s still early days in the development of a competitive electricity retail market.

I said it would take 12 to 18 months for electricity price competition to develop fully. We are well on track to achieving this.

The experience in other countries where retail competition has been introduced – such as the UK and Norway – is that quite a small number of consumers actually switch retailer. Around 5 percent in the first year.

In the five months following the introduction of low-cost switching, I understand at least 25,000 New Zealand customers switched retailer. That’s nearly 3 percent of all the consumers who have a choice of competing price plans from competing retailers.

If that switching rate continues for 12 months, it will produce a rate for the year of over 6 percent. That means our rate is in line with, or perhaps a little higher than in those other countries.

There are two messages you should take from this.

If you haven’t reviewed your electricity supply arrangements, you should.
And if you haven’t negotiated a better deal with your existing supplier or a new one, then you’re almost certainly missing long-term cost-saving opportunities at home and at work.

Wholesale electricity market maturing

The wholesale market had a head-start on the retail market.

But we saw problems there with so much of the market supplied by one generator.
The split of ECNZ into three companies balances the generators’ market much better. And the sale of Contact Energy to the private sector allows the state-owned generators to benchmark their performance against an investor-owned generator.

The sale to Edison Mission Energy – plus thousands of ordinary New Zealanders - has important spin-offs for the Government’s wider fiscal management. That money can be invested in our future.

The Electricity Reform Transition Unit - when it presented its final recommendations on the split of ECNZ – said it expected average wholesale prices would be between 14 and 20 percent lower on average as a result of the introduction of vigorous competition.

Wholesale prices have, in fact, fallen by 50 percent on average since the beginning of April 1999.

Wholesale prices are obviously affected by weather conditions and hydro lake levels, as well as the reforms. Lake storage levels are currently running slightly below the historical average, but not dramatically so. It seems fair to conclude that the current very low wholesale electricity price is a sign of vigorous competition. So, while it is early days, it appears we are reaping the gains expected from the generation split.

Having said that, these prices are probably not sustainable at these low levels. But it does seem that the Transition Unit’s prediction will be achieved, and may even prove to be conservative.

Distribution line businesses – unfinished business

While it is easy to reflect positively on developments in wholesale and retail electricity, I still have concerns about line businesses.

Consumers are almost certainly paying too much for the conveyance of their electricity. Some of my concern stems from line business valuations, which many of you in this audience probably have a direct hand in.

Continuing increases in ODVs allow line businesses to increase prices without raising profits to levels that might attract regulatory attention. Over the years, some ODV valuations have lacked rigour, and Government officials have been forced to continuously tighten the ODV methodology. The Ministry of Commerce is right now in the process of reviewing the methodology again.
The defining event came in the course of ownership separation, when power companies sold functions such as meter reading and associated assets without reducing line charges to reflect their new lower cost structures.
At that point, the Government reluctantly concluded that price control must be imposed.

It must be clear from this Government’s track record in promoting competition over our years in office that price control is not our weapon of choice.
We are prepared to use it, however, in the face of line company intransigence, and the clear lack of the sorts of incentives you find in competitive markets to minimise costs and lower line charges accordingly.

We are prepared to use it to make sure that consumers – at home and in business – reap the full benefits that the electricity reforms have to offer.
We are prepared to use it. But our political opponents – Labour, the Alliance, ACT and New Zealand First - have blocked the legislation that would allow us to take action. Those parties show disregard for the needs of our homes and businesses. They have come down on the side of monopolies, not consumers.
Nevertheless, I have no doubt that, one way or another, we will see price control imposed on line businesses in the not-too-distant future, whatever the outcome of the general election.

That is some small comfort.

By then, it will be too late to wind back this year’s line charge increases. Consumers will be the losers. That lost opportunity is frustrating to the Government. More significantly, it is an unnecessary cost to New Zealand businesses and households.

Ongoing benefits of the electricity reforms

Price control is a significant piece of unfinished business. Putting it in place will bring real pressure to bear on line business costs for the first time ever.

Given that distribution line business charges make up about 40 percent of the final bill, they have to be the focus of government’s attention. Transpower’s prices are also an important factor, and there the Government can maintain pressure through ownership as well as price control.

The wholesale market has coped well with the changes brought about by the latest reforms. The market boasts more depth and breadth today than it did prior to the ECNZ split.

Doomsayers predicted that the wholesale market would struggle once generators were freed to sell electricity to consumers of any size. That has not happened. And won’t happen.
To many consumers, though, the wholesale market is a mystery. What’s real to these people is their power bill.

I congratulate retailers for taking the opportunity presented by the reforms.
I encourage them to push, to compete, to innovate.

I can assure those retailers and their consumers that this Government will continue to put pressure on line charges to ensure that we deliver the full benefits of the reforms to everyone.

Thank you for your attention. I have time for a few questions.

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