Molly Melhuishconsumer advocate

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supported by Auckland GreypowerJune 2012

NZ is the only country in the world that allows industry to regulate itself

this enables companies to maximise their profits

asset sales would lock this in

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NZ the only developed country with relentless price rises over the long term

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Quasi-monopoly pricing for domestic consumers

assures suppliers returns on their investment

the monopoly is not on the supply businesses, but on control of the regulator

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How deregulation happened

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Electricity Act 1992 deregulates electricity

Labour, 2000, sets objective to ensure efficient, reliable, fair, sustainable electricity supply, and promote energy efficiency

industry refuses to implement Labour’s changes

Consumer rights extinguished!

Electricity Industry Act 2010 removes concepts “fair”, “sustainable”, “all classes of consumers”

Electricity Authority interprets this saying that wealth transfers from domestic to industrial consumers are legal and desirable

Authority protects investors not consumers

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Thus the 2010 law effectively changed the objective of regulation

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electricity no longer treated as “essential service”

electricity now developed to promote economic growth

How NZ’s pricing worksdomestic consumers pay

– costs of electricity from new power stations

– additional costs of competition

– and costs to renew transmission and local lines

the largest industries negotiate prices down to around the cost of running existing power stations

this means domestic consumers are subsidising industrial consumers

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Impact of asset revaluation

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In NZ’s pricing system, the value of assets is not the cost to build them, but what they will earn.

as prices rise, the assets are revalued, so the return on assets remains within “reasonable” levels.

In 2010, half the value of both “gentailers” and lines companies is from revaluation, not cost to build

Scarcity pricing

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shortages are profitable, so companies create scarcity and push prices upwards

shortages in dry years gave power companies $4.3 billion between 2001 and 2007

2010 Act puts electricity shortages into the market, with scarcity pricing rules that allow increased profits

Wholesale price reached $20/kWh for 7 hrs in 2011

Householders now pay more for electricity than ratesOther household energy prices follow electricity price rises

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Outcomes from pricing system

Outcomes from self-regulation

dominance of the electricity sector spills over to pricing of other household energy forms

energy conservation is unprofitable and must be supported by central government

tariffs that could reduce peak loads are not supported by electricity retailers

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Impacts of the pricing systemEnergy hardship

– the sad choice, heat or eat

– hospitalisation, elderly and babies susceptible to cold

- 1600 excess winter deaths, one of the highest in world

- illness, lost productivity, lost school hours

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Impacts of the pricing system

burden on small businesses

– electricity price rises and risks of rate shock

– energy efficiency and renewables businesses losing customers, losing government support, closing down

- reliability suffers through incentive to create scarcity 18

Conclusions 1domestic power prices are rising because of

pricing rules that promote profit maximising

NZ is unique in the world in its pricing system that exploits domestic consumers to support economic growth from industry expansion

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Conclusions 2

electricity and other household energy is unaffordable for increasing numbers of householders

cold houses are still a major health problem in NZ

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Issues from selling assets

likely public revolt against price rises

threat of re-regulation

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Issues from selling assets

only companies with very deep pockets can manage risks, and offset them through their lobbying power

hence large foreign companies likely to be the eventual owners

corporate responsibility obligations of SOEs are lost

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Private companies charge 3.3c/kWhmore than SOEs, Feb 2012

Some issues - regulationElectricity Authority condones large “wealth transfers”

from small consumers to suppliers and major electricity users

“code development principles” have no policy content but use “net national benefit” (NNB) analysis

NNB example: 1992 leaky homes de-regulation may have had positive NNB – but incurred $11.3 billion financial liability !

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What to do – work within systemwork within system to minimise harm

one advisory group has a DEUN memberGrey Power nominee for another advisory group

attend Authority briefings, raise controversial issues

discuss issues with Authority staff and other regulators, e.g. alternative regulatory systems

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Use technicalities of Codeparts of the Authority’s foundation documents have

room for interpretation, e.g.

“If wealth transfers seriously undermine confidence in the pricing process or in the electricity industry more generally …

then that can inhibit efficient entry and investment decisions and …

these effects should be taken into account when evaluating proposals.”

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What to do about it, longer term

re-regulate electricity to treat it again as an essential service

remove the right for power companies to maximise profits (price-gouge)

regulate for genuine consumer representation and protection

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Consumer protection required

• NZ consumer representatives - no access to outside expertise

* Australia - strong independent and funded consumer advisory groups ~$2m per year

UK has both government and independent consumer representatives, and is re-regulating

US: different states have various consumer protection mechanisms but all receive public provision or support

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Therefore: don’t even consider energy asset sales

until regulation protects consumers not investors

and has cross-party agreement on objectives

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Bruce Jesson

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