Editorial: Brownlee's reforms on the right track

According to Consumer New Zealand, the Energy Minister's rejig of the electricity sector is the last-chance saloon for the industry's competitive-pricing model. "If it's not working, I don't think we should pretend and the Government should accept that the competitive model doesn't work in a utility-type industry," chief executive Sue Chetwin said.

Try telling that to the millions of New Zealanders who have benefited from competition in another utility industry, telecommunications. Clearly, the task is to provide the setting for competition to flourish. It did not come easily in telecommunications and has proved even more problematic in the electricity sector. Gerry Brownlee's restructuring aims to remove the key obstacles to competition.

Critics of his plan, largely an adoption of a ministerial report on the electricity market, would doubtless see strict regulation as the best means of restricting the growth in power prices. Mr Brownlee has, himself, threatened further intervention if competition is not forthcoming. But, normally, any such regulation should act as a temporary substitute for competition while aiding its development. Certainly, there is nothing to suggest the splitting of a state-owned monopoly into a number of smaller, competing generators was somehow fatally flawed.

The sector's main problem, contrary to popular perception, is not a shortage of physical capacity. It is the onus on generators and retailers to manage their risks and make the most effective use of their collective resources. A particularly handy backstop for them, but a cost to consumers, has been their ability to push for conservation campaigns whenever they become overexposed to spot prices.

The minister's plan includes a range of measures to improve the incentives on generators to contract among themselves to improve risk and resource management, while cultivating competition. A key element is the setting up of a liquid electricity hedge market. This should enable companies (including lines companies) with limited generating capacity of their own to enter the electricity retailing business by contracting for future supplies. All the big generators will have to put up a combined 3000 gigawatt hours of electricity into the market and to act as market makers. That represents nearly 8 per cent of national demand.

Additionally, there are to be physical and virtual asset swaps designed to give the North Island state-owned enterprises sufficient electricity to compete with the South Island incumbents, Meridian and Contact Energy, in the south and give Meridian enough electricity to seek customers in the north. Like Britain before it, New Zealand has found its original template encouraged a series of regional markets, which limited competition. Overcoming this will mean smaller users of electricity can buy their power from different nationwide suppliers. To promote the idea of customers switching between retailers, the Government has established a $15 million fund.

Mr Brownlee is also intent on making generators and retailers compensate consumers for conservation campaigns or dry-year power cuts. That creates a financial incentive to prevent an outcome that has actually benefited them in the past. The abolition of the Electricity Commission is also designed to increase the attention that power companies pay to their supply risk.

There is, inevitably, an element of trial and error in this striving for optimum competitive pressure. Mr Brownlee has, therefore, been wise to predict a moderating of power price rises, rather than a fall. But his initiative appeals as a strong push along the right path.