Rush to power reforms blank cheque for chaos

You push the switch, the light comes on. Later, you pay for the electricity. How did this simple idea become so confusing and so costly? CHRIS DANILES looks for answers.

In late May 1999 the electricity industry was in a mad rush, with one mighty deadline looming.

It was election year, and Energy Minister Max Bradford, under pressure to finally deliver cheaper power to households, had laid down the hard word.

He ordered the industry to introduce "low-cost switching," so consumers could switch between power companies at will, quickly and cheaply.

The power companies had to help bring the promised benefits of competition to homeowners across New Zealand. And fast.

A committee was formed - the retail competition committee - nine men and one woman, with all but the chairman, Christchurch academic Dr Grant Read, representing some part of the electricity industry.

The power companies had been competing for big industrial and commercial customers for years, but never had they been able to fight over homeowners.

Just 20 years ago, commercial users paid twice as much for their electricity as residential customers. But now, after more than 10 years of restructuring and change, homeowners paid more than commercial users.

Power competition for households had therefore been decreed. They were to be treated like businesses, with rival companies fighting to supply them with electricity.

But there were problems. Commercial power users have "time of use meters" that calculate how much power is used and at what time of the day (different prices apply to different times).

These meters are too expensive to put in homes.

The retail competition committee aimed to work out a fair system of competition. But the result was chaos.

The members made their April 1 deadline. But, 20 months later, it is now agreed that they fired the starting gun for a shambolic race.

For on April 1 power companies, many of them state-owned enterprises, embarked on an orgy of marketing, advertising and branding, followed soon after by late bills, mis-read accounts, disconnection threats and clogged telephone call centres.

Information about customers wanting to change power companies was not passed on properly, leading to long delays in billing. Computer systems and call centres were not good enough to cope with the inevitable customer queries and problems.

Splitting off the lines companies (which own the lines) from the retailers (which sell the electricity) has meant people no longer know whom to ring when the power goes off or they have a fault in their home.

Even the architect of the changes, Mr Bradford, now a National list MP, admits things did not go according to plan and consumers were the losers.

"I accept that in the end the responsibility is mine, but I was acting on the best advice at the time and everybody said, 'Look we'll be okay.'

"In fact, what happened was that a lot of companies, particularly those that bought customers from other companies, found that their billing and computer systems were for the most part a shambles."

Mr Bradford said some companies actually decided to frustrate competition and protected their own customer base by making it difficult for customers to switch companies.

Not our fault, said the industry, the Government demanded too much, too soon.

Mr Bradford said he acted on the basis that the companies would compete in good faith and "if they lost customers then they wouldn't take it out on their consumers, but that's effectively what happened."

So how is the electricity industry now arranged?

Once electricity is generated at a power station, it can go through up to four different organisations before arriving at your home.

If a company owns a power station, it can own a retail company, selling electricity to homes and businesses.

It cannot, however, own a lines company. Lines companies, such as Vector and UnitedNetworks, own all the powerlines in a geographical area. They are monopolies, and charge retailers to use their lines to supply homes and businesses.

Most of the monthly fixed charges on a power bill go to the lines company and Transpower, the Government agency that owns and maintains the national grid.

There are eight major power companies that are both power generators and sellers. These run the major power stations and feed electricity into the national grid. They then compete to supply retailers (and their consumers) across the grid.

Companies such as Mighty River Power, Genesis and Meridian are state-owned enterprises. Their retail arms often sell power under different names. Mighty River, for example, trades under both the First Electric and Mercury names.

As retailers, these companies compete to sell electricity to homes, businesses and factories.

It was not until April last year that they could compete properly for residential customers. There is now no reason a home in Northland cannot buy electricity from a power company in Bluff.

This system might sound quite reasonable. But the way events unfolded produced great confusion.

In April 1999, the 10 members of the retail competition committee had agreed on a complex system called "deemed profiling." This allowed power retailers to determine the cost of electricity sold to householders based on average "profiles of consumption," so the expensive meters used by big companies were not needed.

That just means that because the companies could not work out how much power was used in households at particular times of the day, they agreed on estimates of what an average household would use.

Robert Reilly sat on this committee when he worked for the Electricity Corporation of New Zealand.

It had four months to agree on profiles and a new system of numbering meters to allow competing companies to agree on who was supplying which customer.

"It's a wee bit of a miracle we got there in time," he said. "Maybe if we hadn't had such a tight deadline we might have done a better job."

This ability to switch companies, the very foundation of true competition, soon appeared to have been pointless. The industry was ill prepared and could not cope.

In its final report to the Government, an inquiry into the power industry said this year that it had been presented with "considerable evidence of barriers to switching, including poor billing practices, excessive delays in switching, the uncoordinated provision of services by distribution and retail companies, alleged anti-competitive practices and unjustified disconnections.

"These problems are, at least in part, a result of generators and others, without sufficient preparation, rushing to compete for retail bases."

The April 1 Bradford reforms also split the state-owned ECNZ into three competing companies. They later became Mighty River Power, Genesis Power and Meridian.

Any retailer or generator of electricity also had to get rid of its local network of powerlines.

It is hardly surprising that many consumers are confused by what is a lines company, a retailer or a generator.

In Auckland, for instance, Mercury Energy became the lines company Vector, selling the Mercury name to Mighty River Power - the Government-owned corporation that also owns First Electric.

All this took money. Money for new stationery, chairs, advertising, "corporate branding," lawyers and merchant bankers.

The past 20 months have left energy analyst and consumer advocate Molly Melhuish with a sour taste in her mouth.

"The service has become appalling," she says.

"Electricity is an essential service to the home. There is a terror of disconnection. These companies are very happy to threaten disconnection if you don't respond to their problems in their way.

"This is a system that has had no happy spinoffs for consumers at all. They are paying both physically higher prices to pay for competition, to pay for the huge fees taken by the industry and the merchant bankers and lawyers. All they are getting is wrong power bills and threats of disconnections."

Former Labour Energy Minister David Caygill was asked to head the latest inquiry into the electricity industry and agrees that the first experience of competition was not a success.

"It shouldn't have happened like that. No one can say that's just something we had to put up with."

He does, however, believe things are improving.

Government directives forcing companies to compete, at exactly the same time as they were being forced to split their lines business from retail and generation, were largely responsible for much of the consumer shambles, says Mr Caygill.

Companies, even if they were not ready, were forced to enter the competitive fray simply because rivals were doing the same.

"We created a system where people were allowed to compete, but actually what it meant was they virtually had to."