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Simon Orme: Mainstreaming - NZ Electricity Inquiry

Simon Orme writes from Sydney

[Aside from writing occasional columns for Scoop, Simon Orme earns a living as a consultant in Australia’s broad and lush energy markets.]

Mainstreaming - NZ Electricity Inquiry

The NZ electricity inquiry report (1), released this week, is a move toward the international mainstream in electricity regulation, which is not a surprise given the Australian and British leanings of the inquiry panel. However, the move to a compulsory market governance body seems at odds with international trends, and probably with good sense.

NZ is unique, internationally, in that its monopoly electricity businesses (the local lines companies and Transpower) are not subject to economic regulation – otherwise known as price controls.

In Australia, the UK and the US, monopoly electricity businesses are subject to revenue caps (rate caps in the US), intended to give businesses incentives to lower prices.

The NZ aversion to price controls can probably be traced back to Muldoon’s King Canute-like 1982 wage-price freeze.

But the aversion is also based on the fact price regulation is expensive and doesn’t work that well.

Australia’s electricity businesses are subject to State and National price regulation that wouldn’t look out of place in David Lange’s Polish shipyard.

“Gaming” the regulators and “forum shopping” are major business activities in their own right. “Regulatory managers” get paid bonuses for successful regulatory plays.

The main problem is regulators have to foresee what the power market will look like in three, four and even five years.

They can – and usually do - get it completely wrong.

If the regulator sets prices too high, power businesses make super profits and the regulator looks silly.

This is what happened to the Inquiry’s own expert, the UK’s Professor Littlechild, in the mid 1990s. After Littlechild handed down his decision (known as a determination), power company shares zoomed up in value and Littlechild was forced to go back and change his determination.

On the other hand, if the regulator is too tough, there won’t be enough cash and the lights might go out.

Economic regulators refer to a plethora of exceedingly complex methodologies to support their economic fortune telling.

These include: CPI-x, RPI-x, TFP, DEA, ODV, ODRC (because it sounds better than DORC), Tornqvist, CAPM, EVA, and lots of other clever but incredibly arcane stuff. (Really, you don’t need to know what the acronyms stand for.)

At the end of the proverbial day, the real function of these methodologies (aside from employment for clever consultants) is to divert attention from a little black box called “regulatory discretion.”

There is no flight recorder in THIS box. Regulatory discretion remains shrouded in mystery - forever.

So, the Inquiry is to be congratulated for taking on these points and opting for “targeted” rather than “blanket” price regulation. This should prevent abuses by monopolies without creating a whole new regulatory management industry in NZ.

Economic regulation is a huge business which, if you could locate it on the West Coast, would more than compensate for the end of the Accord.

Perhaps regional development is the cunning plan behind the proposed new compulsory market governance body to replace NZEM/MARIA and MACQs (the last of which was headed by Inquiry chair, David Caygill) with a single new compulsory body.

This proposal is perhaps the oddest and least expected outcome from the Inquiry.

The report is silent on the location of the new body. I suggest Reefton on the incontrovertible basis it was the first NZ town with electricity, but anywhere on the Coast is fine really.

The Australian equivalent of the new body is NEMMCO and NECA (the latter being headed by Inquiry member Stephen Kelly). These organisations are already compulsory.

Compulsory means expensive.

This is because power companies can justifiably pass through 100% of a compulsory cost to consumers, no matter what size it is.
Cost control all but disappears. (And that is why you need consumer Reps.)

The joint NEMMCO/NECA budget for the coming year is $A70m ($NZ88m at today’s cross rate), which is $A10m less than the current year’s $NZ100.5m.

On the other hand, the present three NZ bodies, which are voluntary, give you several million back in change out of $NZ20m.

Don’t forget that what these bodies do has enormous economies of scale.

The Australian market bodies “serve” some 7m customers, compared with NZ’s 1.6m, but the bulk of the cost is in the first 2m customers anyway.

Also, Australia’s retail markets don’t yet offer full retail competition services (eg a customer registry and load profiling), and only has five price regions compared with more than 250 in NZ.

The Inquiry report expresses concern the NZEM/MARIA/MACQs don’t have consumer representation and could be captured by dominant industry interests, but no argument is given to support the move to conscription.

This suggests the reasons for compulsion are less than transparent and we need to re-hire those Sovietologists we let go back in the early 90s to interpret the Inquiry’s report.

Except for Australia, the move internationally is away from compulsory electricity market organisations, notably in California and the UK itself.

The trick is to separate the system operator from the market. There can only be one power system but there can be lots of markets.

The UK for instance is moving to multiple (voluntary) power markets. Similarly, California’s power exchange is only compulsory for the big three incumbents during the transition to competition.

The Inquiry also recommended NZ move to a real time wholesale power market. Now, this is a jolly good idea as can be seen by going to: http://www.tg.nsw.gov.au/nem/realtime/ppsdic/nsw-vic/

The main blue line is total NSW power demand – the combined effect of the entire population switching electrical things on and off. It has a diurnal rhythm that looks like a heartbeat on a different timescale. It automatically updates every few minutes so makes an excellent screen saver.

© Copyright: Simon Orme 2000

Feedback to simonorme@hotmail.com

(1) For a copy of the inquiry report, refer to http://www.electricityinquiry.govt.nz/

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