Reforms of little help to many

By Richard Braddell

Once upon a time, a North Shore household would buy its electricity from Power New Zealand and its gas from Enerco. Now, its bill probably comes from Contact, while its electricity is delivered over lines owned by UnitedNetworks.

Something big has happened. In the past 18 months a bewildering succession of electricity reforms have been introduced aimed at fixing earlier changes which did not deliver expected benefits.

The electricity industry has come a long way since 1987 when the state generating monopoly, ECNZ, was corporatised.

In 1994, its distribution arm, Transpower, was split off, as were a quarter of its generation assets in 1995 when Contact Energy was created as a separate enterprise.

While hopes were high that light-handed regulation was going to deliver the benefits of competition and efficiency, the gains were slow in coming.

As a result, the then Energy Minister, Max Bradford, took a sledgehammer to the industry with the Electricity Industry Reform Act of July 1988.

It required the split of power companies into energy and lines businesses by April 1999.

And as of April, ECNZ was split into three more competing generators - Mighty River, Meridian and Genesis - which, in contrast to their lines company peers, were allowed to compete in the retail market.

The starting gun for the largest electricity industry restructuring in this country's history had been fired.

In short order, 1.1 million customers changed suppliers, while five network companies changed ownership.

In Auckland, the lines business of Mercury Energy was renamed Vector after the sale of its retail operation to Mighty River.

And on the North Shore, Power NZ became UnitedNetworks after the sale of its retail business to Contact, which is now the second largest energy retailer behind TransAlta.

UnitedNetworks also became New Zealand's largest lines company after buying TransAlta's Wellington and Hutt Valley lines businesses along with TrustPower's in the western Bay of Plenty for more than $1 billion.

Splitting ECNZ, at least, had the desired effect. With several competing generators, wholesale electricity prices dived, creating a headache for electricity suppliers whose long-term hedge contracts were suddenly out of the money.

Just where the liability for those contracts has crystallised remains a sore, if fudged, point in the industry.

But while the reforms brought huge savings to industrial and commercial users, the long-suffering domestic consumer experienced yet more price rises.

The Government was under pressure. The obvious culprits were the newly created lines companies, the monopoly operations in the electricity business whose charges went on average from 4.5c per kWh to 5.5c in the four years to 1999. Furthermore, the lines portion of the household bill increased from 34 to 39 per cent.

A senior executive of Natural Gas Corporation, Geoff Hollings, said the outcome seemed particularly odd since Transpower had reduced its electricity distribution costs by 3 per cent and most network operators had reduced their cost structures by selling their meters to energy retailers.

"Instead of passing on reduced costs, distributors were taking higher profits.

"The Government was also surprised that some line businesses had been sold for more than their optimised deprival value [their statutory valuation], especially since it considered that some ODVs may already have been unreasonably high," Mr Hollings told a conference in October.

Mr Bradford's solution was to introduce price control legislation last May that would limit lines company price increases to the change in the consumers price index minus a factor known as "X."

The result was tartly summarised by Labour's then finance spokesman, Dr Michael Cullen: "I should acknowledge Mr Bradford's successes. He did manage to unite Labour, Alliance, New Zealand First and Act in declining to support his bill.

"It is a bad idea whose time has passed, and the same can be said for the Government that sponsored it."

The Opposition parties were perhaps not quite as united as the bill's defeat would suggest. But while Mr Bradford blamed its lapse on politicking, Labour and Alliance objections lay in the notion that it did not go far enough.

According to the new Energy Minister, Pete Hodgson, much more work was needed before a "CPI minus X" formulation was applied.

According to Mr Hodgson, there were so many uncertainties surrounding the lines company businesses - for instance, the quality of the aforementioned optimised deprival valuations and marked differences in network configurations and topographies - that to plunge into CPI minus X was to embark on a journey to the courts.

Faced last June with the prospect of a regulatory regime that had to be in place by December 31, Mr Hodgson said the select committee considering the Bradford bill decided the work to support it could not be done on time by the two people at the Commerce Commission working on it.

On that basis, the Labour members concluded that the only thing the CPI minus X formula could safely do was impose a price freeze.

"We thought, 'This is ridiculous, we'll ring the companies and see if they'll give us one'," Mr Hodgson said. "They did. They were highly concerned about the process."

The price freeze agreed by the lines companies ends on July 1.

Meanwhile, Labour is concerned that any price control formulation is applied in such a way that does not damage security of supply.

The rigorous imposition of a CPI minus X formulation has been blamed for inadequate capital expenditure and incidents such as the recent Paddington train crash in England.

Mr Hodgson believes it can cut two ways.

If X is too high, line companies can be tempted to skimp on line maintenance.

Then again, they could argue successfully for a moderate X factor because they intended large capital investment.

But that could still tempt management to improve the bottom line profit by skimping.

"There are several solutions; one is the regulatory solution, which is what the British Government is doing.

"Another is to ask the industry to come up with an arrangement to pay customers if loads are interrupted.

A third solution was to force the companies to do that."