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Bradford - Speech To Launch National Energy Policy

Embargoed Until Delivery
SPEECH TO THE PETROLEUM EXPLORATION ASSOCIATION OF
NEW ZEALAND
Unisys House, Wellington
1pm, 13 October 1999
by Hon Max Bradford
Minister for Enterprise and Commerce

“The National Party’s Policy on Energy”

Thank you for inviting me to speak to you today. I would like to begin by affirming the Government’s commitment to ensuring there is a continuing supply of energy, at the lowest cost to the economy, consistent with sustainable development.

The Government takes seriously its responsibility to ensure there is an appropriate framework in place for business to thrive.

Over the last decade National-led governments have focused on getting the fundamentals right and promoting vigorous competition wherever possible.

Our energy policy has identified competition as a key objective and this focus will continue. Only in this way, will there be consistent downward pressure on costs, and most importantly, innovation and choice for consumers.

This approach is in stark contrast to the positions Labour and the Alliance have adopted.

In the energy sector, both these parties want to cut across competition by imposing arbitrary rules for setting electricity prices and would force wholesale electricity prices upwards by re-amalgamating ECNZ.

Just as they would increase costs to business by re-nationalising ACC and repealing the Employment Contracts Act, Labour and the Alliance want to return to the failed policies of the past.

Petroleum Exploration

National, on the other hand, is taking an innovative, forward-looking approach, which is demonstrated in policies that encourage petroleum exploration and development.

The introduction of the Acceptable Frontier Offer Regime coupled with a new royalty regime has seen exploration activity increase significantly.

Today we have exploration permits granted over six of the country’s petroleum basins, a far cry from earlier days when exploration was almost exclusively centred on the Taranaki basin.

As a result of ongoing exploration activity near Wairoa and elsewhere on the East Coast, there is high expectation that the East Coast region will become New Zealand’s second commercial hydrocarbon province.

It is hoped that the results of recent appraisal testing at Kauhauroa will soon confirm this to be the case.

I often hear mention of how, despite the amount of past and present investment in this area, Taranaki remains under-explored by world standards.

Direct evidence of this continues to present itself, with new ideas and exploration concepts being developed by an ever-increasing number of explorers taking a position in the Taranaki region.
The offshore oil discovery at Maari and plans by Swift Energy to test a number of zones at the Rimu well near Hawera suggests that the Taranaki region will continue to be the premier oil patch in New Zealand for some time yet.

I should emphasis that in my view, the run down of the Maui gas reserves does not signal the need to make changes in our exploration policy.

Continued exploration success in Taranaki, the opening up of new petroleum basins and the government’s pro business policies and objectives will ensure that New Zealand continues to be an attractive place to explore for oil and gas.

Electricity Retail Competition is flourishing

I would now like to turn my attention to what has been the major focus of the Government’s energy policy recently, that is electricity.

Competition in electricity retailing is flourishing.

Looking back to when the Electricity Industry Reform Act was introduced in 1998, I doubt any of us anticipated the speed with which the local electricity companies would be transformed, specifically the emergence of a highly competitive retail sector.

I have just released today a report by the Ministry of Commerce on progress with retail competition.

In summary, the Ministry is optimistic about the overall prospects for retail competition.

The key point to be taken from this report is that at least 60% of New Zealand households now have a choice of supplier and, if they choose to do so, can pay less for their electricity than before the Government’s electricity reforms were announced.
That choice is more than consumers ever had before the reforms.

This 60% continues to grow as new retailers and new initiatives keep emerging.

At last count around 10 retailers were competing in various parts of the country.

It is no surprise that in the early stages of the development of a competitive market, the greatest competitive activity begins with large users and large concentrations of users.

Competition will spread rapidly throughout New Zealand over the next 12-18 months with retailers moving into rural areas.

Remember that it is early days in the development of a competitive electricity retail market. There are many more benefits for consumers still to come.

Competition in the wholesale electricity market

The Government undertook a giant step ensuring vigorous competition in the wholesale electricity market by splitting ECNZ into three competing generators.

Wholesale prices have halved on average since the beginning of April 1999.

While the sustainability of these prices may be on the optimistic side, it seems that, not only will the pre-split predictions of 15-20% lower prices on average be achieved, they may even prove to be conservative.

Distribution Line Businesses – Government policy not yet achieved

The Government’s policy objectives have already been achieved in electricity generation and retailing.
The reforms in place are delivering and will continue to deliver benefits to consumers, the economy and the environment, but there is further work needed in the area of distribution.

New Zealand consumers are almost certainly paying too much for the local distribution of their electricity. Line prices should be falling not rising as they have in some areas this year.

I have also said before that we have too many line businesses in New Zealand. There is significant room for efficiency gains, lower cost operation and lower line charges to consumers.

It must be clear from this Government’s track record in promoting competition over our years in office that regulation is not our weapon of choice.

We are not prepared to fetter the forces of competition where it exists. Competition exists amongst the retail and generation sectors.

However, we are prepared to use appropriate regulation of monopolies to make sure that consumers reap the full benefits that the electricity reforms have to offer.

Line businesses, by their actions made it clear that light-handed regulation was not adequate to control them.

This is why the Government introduced legislation to place line companies under light handed CPI-x style control. This is the most common methodology used in other countries.

Because of naked politicking by Labour, the Alliance, New Zealand First and ACT the Government did not have the necessary support to pass this legislation in Parliament.

The legislation still remains on our agenda as important business.
Gas Sector - Information Disclosure

It is also unlikely that competition can act as a constraint on the behaviour of the owners of gas pipes and pipelines. There simply isn’t any as in most areas of New Zealand there is no choice of gas pipelines competing for consumers.

Although inter-fuel competition from electricity may provide some restraint on gas markets, a light-handed approach has been used to deal with potential market power issues in the gas industry.

Information disclosure forms a key component of the light-handed regulatory regime.

Today I have also released a discussion paper containing proposals to strengthen the information disclosure provisions and improve the quality and comparability of disclosures by gas companies.

This will give the market, consumers, and gas retail companies more objective information to judge the performance of the monopoly pipeline companies.

Petrol Retailing

This Government has vigorously promoted competition in the petroleum retail market.

With the entry last year of new companies such as Challenge and Gull this has been achieved.

We are all aware that, in response to increases in crude oil prices, petrol prices have been rising over the last few months.

This is unavoidable; we cannot expect companies to absorb significant increases in the cost of their raw material.
However it is very clear that oil company margins have been squeezed with more vigorous competition.

There is no doubt competition has made a significant difference in this industry.

Indeed, only today as crude prices have fallen, we’ve seen retail petrol prices fall. This speed of reaction by the oil companies is unprecedented and shows the remarkable benefit of competition started by this Government 18 months ago.

Energy efficiency, renewables and climate change

I will round out our energy policy by summarising our approaches to energy efficiency, renewables and climate change.

Overall, the Government believes that the best way to encourage continued improvement in energy efficiency and the development of renewables is by:

 removing barriers,
 encouraging the uptake of new technologies,
 ensuring accurate price signals are available to the market consumers,
 and letting the private sector and consumers get on with the business of making investment and risk decisions.

We are making some notable gains.

For example, we have seen the development of wind generation without Government subsidies or compulsion, which is unique in the world as far as I’m aware.

However, the Government recognises that it has an important role to play, through EECA, in promoting energy efficiency and renewables and overcoming information barriers.

EECA will continue to play a key part in the Government’s overall energy strategy. National will beef up EECA as a key component of our climate change policy.

This is particularly relevant given our international commitments under the Kyoto Protocol to play our part in reducing global greenhouse gas emissions.

The promotion of energy efficiency is an important component of this, but it is unlikely to be enough.

Energy policy has always been an important part of National’s overall economic policy. Significant progress has been made in the 9 years we have been in government.

We are carefully examining the options available to the Government to meet our long-term climate change commitments.

Above all, we are determined not to impose unnecessary costs on our businesses and our economy.

Conclusion

The Government’s energy policy objectives I talked about at the beginning of my speech will be best met through the market by promoting effective competition wherever possible.

This is the underlying principle behind our current and future energy policies.

We have made significant progress in the development of competition in the petroleum, gas and electricity sectors.
Consumers and the economy as a whole have and will continue to benefit from the reforms that the Government has put in place.

Petroleum exploration under our policies is healthy and the future looks promising.

We are making encouraging progress on energy efficiency, renewables and our obligations on climate change.

Overall then, I believe we can point to considerable achievements.

We have got the fundamentals right, and we can look forward to a vibrant and efficient energy sector.

I am happy to answer any questions you may have.

Thank you.

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