Friday 15 December 2000, The Duxton Hotel, Wellington Hon Pete Hodgson Speech Notes

The Power Package

(Address to the IIR Power Package Electricity Reform Conference)

I want to talk today about the challenge laid down to the electricity industry by the Government’s Power Package.

It is a challenge. When I introduced the package in October I said the Government was putting the heat on the electricity industry to improve its performance. I chose those words carefully. We have set out deliberately to put the pressure on, but stopped short of heavy-handed regulation. The industry and its customers have suffered enough from Government-driven turmoil in the past couple of years.

Like many of you, no doubt, I read with interest Max Bradford's admission in the New Zealand Herald earlier this month that the changes he introduced did not go according to plan and consumers were the losers.

Max blamed electricity retailers for running inadequate billing systems and deliberately frustrating consumers' attempts to switch. I agree with the Herald that the industry's billing and switching problems were inevitable given the haste with which Max drove through his reforms.

The problems were predictable and plenty of people predicted them. Max barrelled on regardless and the effects are still being dealt with today.

This Government has acted because New Zealanders deserve a better deal from the electricity industry. They deserve an efficient, fair, reliable and environmentally sustainable supply of electricity.

The reputation of the industry has suffered greatly in the recent upheaval. It seems that electricity companies have joined the banks as the retailers the public loves to hate.

Many domestic consumers feel frustrated and powerless, faced with billing and switching difficulties, rising fixed charges and in many cases the disappearance of their local trust from the retail scene. Service, undeniably, is often poor. High fixed charges hurt the most vulnerable members of our society.

It is in nobody's interests to let this continue. The Government has been challenged to fix up the mess we inherited, while avoiding another round of upheaval. Our response, the Power Package, is a strategic and comprehensive approach to improving and stabilising the electricity industry.

The package has two main aims. The first is to deliver fairness to all consumers, particularly small consumers. The second is to promote environmental sustainability and energy efficiency.

David Caygill's Inquiry told us industry self-governance could deliver the results the Government and the public want. Decision-making, the inquiry said, should be pushed as close as possible to those with the relevant knowledge, capacity and accountability. One of the strengths of the self-regulatory framework is that it provides the flexibility for the industry to keep up with future changes and advances in technology.

We have taken the Inquiry's advice and self-governance is a centre-piece of the Government’s electricity policy. I have said many times that the Government favours industry solutions where possible and regulatory solutions where necessary. The challenge to the industry now is to show that Government regulation is not necessary to achieve the results New Zealanders deserve.

I have confidence in the electricity industry. In the past you have demonstrated your ability to think innovatively and act quickly, and I know that many of you are willing to think in terms of social responsibility.

The stakes are high for all of us – for consumers, for the industry and for the Government. If self-governance does not deliver, regulation will follow - and the costs of regulation to industry participants would be considerable.

Last week I released the Government Policy Statement on electricity in its final form. It sets out the Government’s views on electricity industry governance and its expectations for industry action to improve performance. It is the blueprint, if you like, for the work we expect the Electricity Governance Board to do.

Thanks to those of you who made submissions on the draft. We sought technical improvement, rather than fundamental change, and we received a number of useful suggestions.

As a result we have refined a number of the policy statement's guiding principles. We have added a new guiding principle requiring that the quality of electricity services, particularly when there are any trade-offs to be made between quality and price, should reflect customers' preferences as far as possible.

We have added a requirement for generators to disclose the reasons for hydro spill, as well as the amount, timing and location. And we have clarified the mechanism for imposing fines when the Ombudsman considers a company has breached market rules, including a clarification that no double jeopardy arises.

Last night I met David Caygill, the Chair of the Electricity Governance Establishment Committee, for an update on the industry's progress towards the goals in the Government Policy Statement. I expect to release the establishment committee's first progress report to me in the next few days. A significant work programme is under way and I'm pleased the industry is getting on with the job.

Effective governance is the key. The industry must establish the governance arrangements promptly, taking into account the key design principles in the Government Policy Statement. It is also important for independent people or parties, such as consumer groups, to have the maximum opportunity to contribute to the rule development that's under way now.

I understand that it will take some time to work through the issues but it is important the Governance Board is established and in a position to manage the electricity industry as soon as an authorisation from the Commerce Commission is received.

I expect a further report from the establishment committee by the end of February, commenting specifically on the establishment of the Governance Board. Progress in setting up the board will be a litmus test of the industry’s resolve in delivering robust self-governance. The industry needs to demonstrate it is willing and able to meet the Government's expectations.

Other work in progress includes the development of a complaints resolution procedure, including an Electricity Ombudsman. Given the present level of consumer unrest, this is obviously a matter of importance.

The news media have been having a field day with the problems electricity consumers have been experiencing. I am told that even my ministerial colleague, Phillida Bunkle, has been threatened with debt collectors by her electricity company, although it has since apologised.

So I am pleased to hear that the industry is working cooperatively with consumer organisations and the Ministry of Consumer Affairs to shape a complaints scheme that meets the Government’s requirements.

The key requirement is independence. Consumers must be fully and meaningfully involved in the development of crucial aspects such as the rules and terms of reference for the complaints system. The system must also be fair, accessible, efficient, accountable and free for consumers. I look forward to seeing it open for business in a few months' time.

Fixed charges are a great source of discontent to electricity consumers and I will not be alone here in receiving numerous letters about them. The Government expects all retailers to offer at least one tariff to domestic consumers with a low fixed charge - likely to be around 30 cents a day. I believe this will deliver a fair choice to the most vulnerable members of society, especially the elderly on low fixed incomes, and will encourage energy efficiency.

A number of retailers have pointed out that the fixed line charges they face from distribution companies are often higher than 30 cents a day, meaning that retailers may make a loss on sales to small domestic consumers.

My response to this is that it is up to the industry as a whole to make this work. It may well involve distribution companies re-arranging their own tariff structures to ensure that meaningful competition can take place for small domestic consumers.

I gave that message to a recent Electricity Networks Association conference. The early signs are that they heard it clearly.

It is important that retailers and line companies communicate effectively on this issue. If the industry cannot agree to a workable solution, the Government will create its own solution by regulation. This may need to involve regulating lines companies as well as retailers. It is clearly in line companies’ interests to work closely with retailers to avoid this.

I note that Transpower announced this week it is cutting its charges by an average of 14 percent from April next year. That is welcome news. I expect consumers to see the benefit of this reduction and I expect it to be helpful in achieving the rebalancing of fixed charges that Government policy requires.

You will have noticed that the Electricity Industry Bill was introduced to Parliament this week. It is the legislation that will give Government the power to introduce its own solutions if industry self-governance does not deliver.

There are targeted powers in the bill to address particular issues if the industry or the Electricity Governance Board do not meet Government expectations. These powers, which will be quite extensive, relate to:
 fixed charges;
 the consumer complaints resolution system, including an industry code of practice for both distributors and retailers;
 customer switching;
 the availability of pre-payment meters;
 transition arrangements if a retailer becomes insolvent;
 connection of distributed generation to distribution lines;
 disclosure of information about hydro spill and hedge prices;
 and a code of practice for trust beneficiaries’ rights to information and meetings.

In all of those areas the Government will be able to regulate to achieve the results it seeks, if the industry does not make satisfactory progress.

In the event of a serious failure in the self-governance model, the Bill also gives the Government the power to establish its own board as a Crown entity. The members would be appointed by the Minister and I can give no assurance that the members of such a board would be chosen in accordance with the industry’s preferences.

A Crown entity board would have the power to make recommendations on industry rules. Regulations or handbooks would then be issued by the Government, after taking account of the Board’s advice. The Minister would have the power to direct the Board to carry out particular functions or to give effect to particular policies. Funding to cover the operating expenses of the Board would be met by a levy on industry participants.

The legislation containing these powers will go through the normal select committee procedure early next year. The Bill is being referred to the Commerce Committee, which will call for submissions in the usual way, and I urge you to respond. The Bill will not be rushed through. Those days of bad process are gone.

It is very important for industry participants to get their act together before the select committee considers the Bill. If the committee perceives that the industry cannot agree on key issues, questions will be raised about the whole self-governance framework. Let’s try to avoid that. I am sure you do not want any lack of progress towards self-governance, or industry shortcomings in meeting the Government’s objectives, to be a key focus of the select committee.

I hope to see the Bill enacted in May 2001. The Commerce Commission will not be able to exercise its price control powers until then, but I expect many other elements of the Power Package to be well in train by next winter.

In the next few months the electricity industry has a chance to make up some lost ground with the New Zealand public. It has a chance to show that self-regulation can work. I will be watching closely, and I expect those chances to be taken.

Thank you.

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