Power doesn't rest in hands of consumers at end of the line

By RICHARD BRADDELL

WELLINGTON - Ask a householder about electricity reform in the last 10 years and the answer may well be: "Why the bother?"

After a decade of inexorably rising electricity prices, in part through the rebalancing of tariffs in favour of commercial users but seemingly also due to the abuse of monopoly positions by power suppliers, consumers have every reason to be brassed off.

Even with the mandated split of energy retailing from electricity lines last year, few consumers have seen lower charges and some have been severely inconvenienced even while wholesale electricity prices have tumbled.

Against this background, public hearings into the Government's inquiry into electricity got under way two weeks ago. Ask people to complain and they will.

And so it should be no surprise that the inquiry panel heard concerns about practices at every level of the electricity industry.

But although the consumer market is clearly unsatisfactory, the panel, made up of former Labour Finance Minister David Caygill, former Commerce Commission chairwoman Susan Wakefield and an Australian regulator, Stephen Kelly, has a much wider brief.

In addition to examining issues that are constraining competition, they also have a responsibility to inquire into industry structures and practices that threaten the security of supply.

In a sense, the public hearing in Wellington over the past two weeks started with the easiest bit first - the consumer market.

Two problems stand out. The first is that the lines companies created last year have little effective constraint on their ability to charge monopoly rents, and secondly that competition among energy retailers has not grown as quickly as hoped.

Largely, the second problem has been due to obstructive practices by incumbents when it comes to switching customers over to new retailers when they win customers.

One of the bitterest complainants in this regard is the chief executive of Meridian Energy, Dr Keith Turner.

Meridian is one of the three state-owned generators created when ECNZ was broken up last year. But with more than a third of the country's generation capacity, it has struggled to build a retail customer base.

The going has not been easy and although it now has 100,000 customers, Dr Turner says obstructive practices have gone as far as to include refusing to accept a switching notice because it gave an address as St rather than Street.

While Dr Turner conceded that switching problems derived as much from the market's hasty creation under the previous Government and the short time that gave to establish satisfactory protocols and systems, he said incumbent retailers were also defending what he frankly admitted were good profit margins.

As the panel's Mr Kelly summarised on his behalf: "Retailers do very well out of their customers, thank you. There is a clear incentive for retailers therefore to hang on to their customers, therefore it's not surprising that they make a monkey out of switching arrangements."

That may be so. But negotiations are nearing a close that promises industry-agreed switching protocols reasonably soon.

The difficulties with lines companies seem more intractable.

To their credit, they did agree to a freeze on charges in the middle of last year in return for Labour and minor party support in defeating National Party legislation that would have enforced a price regulation regime known as CPI minus X.

CPI-X restricts rises to the movement of the consumers' price index less X which, in the early years at least, is likely to be large enough to result in significant real declines in lines charges.

But while the Consumers' Institute and the Major Electricity Users' Group called for the immediate imposition of CPI-X, lines companies were concerned that too stringent an application could result in reduced maintenance levels, ultimately compromising service quality and security of supply.

The Electricity Networks Association, which represents 28 of the 29 lines companies, joined a chorus of calls from all sectors of the industry to allow the market to settle down before any decisions are made on regulation.

But why should customers' wait longer, having waited many years already, Mr Kelly asked.

As the managing director of Comalco, Kerry McDonald, warned, the line and retail issues needed to be addressed or consumer dissatisfaction would lead to ongoing industry instability.

The challenge is tough.

Disclosures and asset valuations have been manipulated to justify higher returns.

And as Mr McDonald said, reform so far has left the lines company directors in the enviable position of being pigs in clover since they have been given little clear direction on whether they should concentrate on maximising shareholder returns or worry about broader and more balanced objectives.

One critical barrier to retail competition, raised by retailers and recognised by some of the lines companies themselves, is that the lines company practice of collecting a large chunk of revenue through fixed rather than usage-based charges makes competing for lower-volume customers unattractive because fixed charges soak up most of the profit margin.

The argument for fixed charges is that lines have to be built and maintained no matter how much electricity is used.

But as various speakers pointed out, other businesses, such as petrol sellers, are unable to break out their fixed costs as a monthly charge and the only reason lines companies can do so is that they have a non-contestable monopoly.

But while the problems are most glaring at the consumer end of the market, the national grid operator, Transpower, and the wholesale market also came in for strong criticism.

While Mr McDonald was content to recognise that Transpower's new board and fresh statement of corporate intent had introduced a different culture, some generators were less pleased.

Mighty River Power, a state-owned enterprise, is heading to court in a dispute with Transpower over what it regards as the unfair allocation of charges for the use of Transpower's Cook Strait cable, while TransAlta is angry that the small amount of power it generates at its Cobb power plant goes no further than Christchurch, and yet it has to meet charges for using the Cook Strait cable that are 80 per cent higher than paid by "another generator."

But as Dr Turner suggests, the judicial process may not produce a result that suits anyone since its decision will be based on the terms and conditions of Meridian's contract with Transpower, and not the validity of the economic cost allocation model applied under Transpower's statement of corporate intent.

TransAlta's general manager of energy, Albert de Geest, goes as far as to say that Transpower should not be entering long-term contracts as long as its pricing methodologies seem as unstable as they are.

Indeed, he suggests that Transpower should be broken into two businesses, one charged with looking after the assets and the other responsible for operational matters and maintenance of security of supply.

But if Mr de Geest was short on good words for Transpower, he was little more sanguine about the three state-owned generators.

Since ECNZ was broken up, spot wholesale electricity prices have plunged, but not as far as Mr de Geest suggests they could if the rules under which they operate were tightened.

Instead, state-owned enterprises can exploit loose rate of return criteria to manipulate short-term electricity prices by withholding supply.

"Spot prices have been falling," Mr de Geest said, "but our view is that they are still well above the short-run marginal costs, which seems odd in a market that's oversupplied."