It's all about giving power to the people

By JOHN COLLINGE*

There is no power shortage yet - but there is a crisis. Demand for electricity is outpacing supply at a disturbing pace. There will, at an indeterminate but reasonably proximate time, be a crisis - even allowing for the load-shedding capabilities of line companies.

The issue is crucial at a national level because power drives the economy. Without future power, expansion will decline. In simple terms, New Zealand needs new generation capacity by 2005 and a plan beyond that.

Why has this happened apparently so precipitously? Perhaps people in the industry who might have been familiar with the issue, and otherwise have spoken out earlier, felt constrained.

The Government state-owned enterprises' executives and board members can hardly speak out publicly for fear of criticising their shareholder. They are appointed by the Government or its appointees.

The distributors, largely owned by trusts (which are, in turn, community-owned), may likewise be reluctant. As we have seen, they can be regulated into submission by the threat of price controls.

The private sector, whether generators, distributors or retailers, is unlikely to risk prejudicing the interests of shareholders.

When individuals speak out, and some have, they are categorised as pessimists by the Government - and hence assigned to fringe status.

In my case, during the restructuring of the 1990s, as a former president of the National Party, I felt constrained in publicly criticising the reforms of my own party although they were made without any consultation whatsoever. The comments here are thus apolitical.

This unwillingness, for various reasons, to speak out is yet another problem with the electricity "market".

The market is, in fact, dominated by the Government at generation, transmission and retail levels. It is far more concentrated in structure than it was before the restructuring because the Government now has a dominating influence in retail as well.

In terms of the market's behaviour, the Government-owned suppliers are, in effect, regional monopolies and are susceptible to gaming practices (a polite term for price-fixing not caught by the Commerce Act) because the commodity they sell is exactly the same but separated by distance.

The separation of entities under a common owner (Government ownership) is window-dressing in market terms - all have to account to a common shareholder. Where is the real competition in that?

Whether the restructuring was part of a cynical plan to take over the industry and to use it as a cash cow I can only speculate. Certainly, the Government has reaped the benefits of returns in the good years - only now to be faced with the inevitability, sooner or later, with some lean years. In the past, the dry year was a normal and accepted fact and planned for.

The response that market forces will work in this context is hollow in the face of the fact that it is conceded that we have a problem of some magnitude. The theory of market forces is sound and market solutions often appropriate, but only if you have a real market in the first place.

Also, in electricity the time for market signals to come through in concrete terms is a particular problem. To plan, build and commission generation capacity takes a long time. There is inevitably a hiatus of some duration before the market signals produce power.

All of this points to supply problems that cannot be rectified by demand signals alone. Of course, central planning is not a perfect system, either - much depends on the people involved. But it is the best we have in the circumstances of electricity.

Unfortunately, there will be costs to remedy the situation in which we find ourselves - whether the private sector or the central planning remedy is chosen. Is it to be borne by the customer by increased prices now so as to encourage development? Or is it better for the community to pay by tax or consumer levy as the cost occurs for any central planning?

The uncertainties inherent in market signals, the potential length of the delay, the serious consequences of shortages and the inadequacy of the market all favour central planning of some kind - not necessarily direct Government intervention.

Further, this is not just an electricity issue. If it were, we might be able to scrape through for a time with savings. It is a national issue going to the quality of life (the ability to switch on when we want) and of economic development.

Here are principles which central planners might adopt. First, planning should take into account national interests extending beyond the bottom line of the state-owned enterprises.

There is plenty of capacity to develop generation; there are huge reserves of coal and there are the West Coast rivers and those such as the Hurunui. We are power rich; it is the exploitation of those resources which is the issue.

The Government, having received the benefit of good years in increased returns, must bear a significant responsibility for the lean years. It is a taxpayer problem as well as an electricity consumer problem.

The lines industry should not be held back from participation in this development, either by prohibition of its involvement or the curtailing of its profits.

Generation or co-generation projects should not be held back by unnecessary barriers. The Government should assist such projects. There should be a fast track for electricity generation under the Resource Management Act. This does not entail a diminution of the standards applicable, merely quicker resolution.

For balance and savings in transmission charges, the system should be more evenly spread - for example, to generation capacity in Northland.

The primary transmission system, Transpower, needs strengthening to cater for the increased supply - in capacity and quality. The inter-island link should be upgraded and the transmission north of Auckland extended. The whole country should be electrified on a similar pricing basis. We are one small country, not disparate parts. It seems madness, in a rural economy, to disadvantage that sector or to make it difficult for remote tourism.

We should never forget our objectives of reliable supply, fair prices and good services. We should never forget, though a distorted market might, that our objective is "Power to the People".

I have been saying such things privately for at least 10 years and regret not having said so publicly. I hope others in a similar position may be encouraged to join in.

* John Collinge is a former president of the Electrical Development Association, and a former chairman of the Commerce Commission and the Auckland Electric Power Board. He is deputy chairman of the Auckland Energy Consumer Trust and Vector.