The Electricity Industry Reform Bill.
The Secretary,
Commerce Select Committee,
Parliament House,
Wellington.
First of all, we would like to complain about the seriously short time available for submissions to be formulated and sent to the Committee on this bill. This suggests that either the Government is so sure that this bill will be exactly right for this country, or that it wants to fob off doubts about it by making the response time too short for people to voice their opinions.
To the extent that the bill is ideologically driven, and not driven by logic, common sense, or social justice, would indicate that the latter is the reason for the short response time allowed.
This is another example of a bill that is altogether too frequently being put forward these days. It is idealogically and industry-sector driven rather than as being drafted from the concerns of everybody, not least of whom are the consumers.
We have seen the so-called 'trickle down' effect of market-driven reforms up before it reaches the level of most need; the ordinary people. This is just another example of that trend. It ought not to be forgotten that 'ordinary people' are consumers too, and if they can't afford to buy, industry loses out in sales, profits drop, and goods and services cost those more well off more and more.
In the "old days" of the Electricity Department electricity generation and supply was not profit driven. However, it was taxpayer-subsidised to the extent of the major generation projects that were built in order to create surpluses and demand. And therefore, the empire-building aspirations of the bureaurocracy in the Electricity Department. On the other hand, there was at least an integrated national plan for the development of energy that allowed, for instance, the protection of Lake Manapouri.
Now we will have the ludicrous spectacle of four or five electricity generators each with their 'national plans' for generation, with the potential to build much more generation than we will ever need in order to be poised at a 'competitive advantage' against their competitors.
Not content with viewing the absolute failure of having four health funding authorities each supplying money to regional hospitals which were required to make a profit; all Government-owned, and having been persuaded to drop that model at great expense and revert to only one Government-owned funding agency, the Government is now wishing to split ECNZ into independent units; making four altogether including Contact Energy. All Government-owned of course, with separate office buildings, chief executives, staff, vehicles, perks, bonuses and elaborate secrecy mechanisms so that none of the four know what any of the others are doing. Not to forget, of course, more ministers of the Crown in charge of each; sitting at the Cabinet Table holding their cards close to their chests; each vying to deliver up a bigger profit than any of the others. Not forgetting of course, that in bidding for gas or coal supply for instance, they are likely to drive the price of that supply up, not down.
The solution to that self-imposed problem is, of course, to privatise the lot. That would be the next step. How then, would the rest of this bill fare in terms of the tight regulatory controls over who is allowed to own what, in the supply sector? If privatisation is the ultimate aim, why isn't, for instance, the Dunedin City Council allowed to hold on to its Waipori generation instead of being forced to sell it off because of this bill? (The DCC has already said that Waipori, rather than Dunedin Electricity; its supply company, would have to be sold if forced to choose.)
That, long term, four State-owned generators would not be successful, is obvious. It boils down to the principle of:
"Prices rise to meet the cost of competition"
This will result in lower valuations of plant and equipment and lower profits to the State owners, exacerbated by higher running costs (four boards, ministers, gear, equipment, bonuses etc - see above). The advantages of competition; lower prices, will not happen. There will remain the potential for invisible 'arrangements' driven by the State owners to frustrate true competition which will be lowering revenue and the tax take from operations. The possibility of excess generation being constructed will be very real. This will increase outgoings by each of the generators in terms of financing this; thus adding to the base cost of generating as well as creating a generating surplus which will simply increase damage to our environment.
The lower overall value of the generating competitors would require injections of taxpayers' money to keep up the debt-equity ratios of each so that the unnecessary and environmentally destructive increase in generating capacity could be maintained, by sustaining the four's ability to borrow.
Each generator would have to maintain a generating surplus because it would have to have that capacity to offer for supply contracts it would secure in the competitive process. Possibly some generators would miss out and be driven to the wall, leaving unused capacity all over the place. Hydro generators would be the most vulnerable, where dry years would wipe out their capacity as they would have no 'balancing' alternatives; gas and thermal; even wind etc. In 'wet' years the cheaper cost of hydro electricity would wipe out the more expensive options to generate and sell by the other companies; so contracts would swap and change over the years and end up in general unstability over the whole sector. One can ask the question; if all generators are owned by the State, why not simply have one generator? That way, a national electricity generating and supply development plan could be devised and implemented, where new generation could be kept to a minimum and options as to what sort of generation could be looked at in terms of maximum protection for the environment. Certainly, minimum lake level protection would fly out of the window if there was 'open slather' competition between generators.
Having observed the strong enmity between Contact Energy and ECNZ at a meeting with the Contact Energy Chief Executive and management two years ago concerning the future of the Tuapeka hydro project, I am certain that there will be absolutely minimum co-operation between generators as each struggles to turn in a profit for its mutual owner; the Government as representing the people of New Zealand. Even if (probably when) privatised, secrecy between generators will increase and the industry will have to be regulated after all, since Government will no longer be able to act through the boards.
Many problems concerned with electricity wholesaling and retailing could be avoided by developing new technology; particularly through the installation of new meters where consumers (not just householders, but industries and retail) could choose the retail supplier of their choice. It is a pity this bill is being rushed through Parliament without giving a chance for informed comment on developments like this being allowed.
As with the health model; where profit-driven CHE's could look around for investment overseas (In Dunedin, a former Chief Executive of the CHE looked to provide hospitals in Arabia), Contact Energy has already invested in generation overseas. We think it is not appropriate that Government-owned ultilities should be investing in other countries. In doing so we expose the taxpayer to calamities that may occur outside our country, even if they are of our own making through poor decision-making. Why was not Contact Energy expressly forbidden to invest overseas? What will be the position for the new generators created by this Bill?
The big loser if the bill is passed, will be the environment. We now see funding being reduced for research and monitoring of greenhouse emissions in New Zealand. There is less funding for energy conservation and scientific research into alternative generating methods. Certainly, the individual generating companies will not be 'wasting' funds on research if they can use up already existing gas, for instance, in the short term, or exploit hydro so long as there are rivers to dam, creating permanently ruinous reservoirs. Is this what we will bequeath to future generations? Lack of long term planning for short term gain, if 'gain' is what this messy bill is expected to deliver?
Then there is the issue of 'user pays'. We are not against user pays so long as even those who are the most impoverished have the means to pay. However, because, like roading, electricity reticulation is in itself a natural 'monopoly' (unlike telecommunications these days), it means those at the far reaches of supply have no option but to pay whatever is charged, and that will be much more than they are paying now because there will be no means to cross-subsidise, otherwise power companies will lose their ability to compete in pricing to larger, closer markets.
The result will be to increase the costs and viability of living in remoter areas. Given the fact that New Zealand has still a farming economy, investment in agriculture will look less inviting; communities will shrink and disperse. Thus the 'flow-on' effect of the reforms has not been looked at by the Government; whereas surely that is what the Government is elected to do - look after the interests, welfare and future of all New Zealanders.
The failure to provide for some sort of regulatory authority to oversee the results of these reforms is regretted. It is no use saying 'the market' will look after everything. It didn't, with the health reforms. Where you have a captive consumer market (that is, everybody needs a certain amount of health, and electricity), competition cannot create demand so that all competitors get their slice of increasing consumption, turnover and profits. Thus prices will not reduce in line with the economies of scale, where turnover will increase and return more income/profit. Prices will simply rise to meet the cost of the competition for a static market. For instance, airline competition can work as the lower prices offered make more travel inviting. In health, more people have to become sick, even if they can't pay, for a profit-driven health system to work. In electricity, the pressure will be on consumers to use more electricity, wastefully.
The foolishness of the bill's plan to create three more generators of electricity (Section 64 and 65) needs some 63 sections of the act involving very highly wrought and discriminatory government regulation of commercial activities in the supply sector to justify it and try to make it work. This emphasises the failure of the bill and the thought behind its creation. This is a bill that will create legislation that will be bitterly regretted later on and worse, be almost impossible to dismantle. It repeats the mistake of the Government's mooted plans to privatise ACC. Only a certain amount of compensation for illness or injury is needed and the amount of it cannot be driven upwards by competing (private) compensation companies. It is different from normal insurance where people have a choice of how much insurance and what kind they need; and of course it is different from private superannuation schemes for the same reasons.
One wonders why the Government will allow ECNZ and it's new competitors to move into the electricity supply business but forbid the Dunedin City Council to retain its generating facility at Waipori along with its supply company, Dunedin Electricity. Such a decision reeks of muddled thinking and discrimination driven by a passion to over-regulate to try to preserve an ideological model divorced from even ordinary every day commercial and social models.
And who will be promoting energy efficiency under this bill? The competitive model mooted is designed to increase consumption to preserve profits. In all of the elaborate 63 sections of the bill this concern is not addressed. The gobbledegook about Trusts and Mirror Trusts is irrelevant and simply reflects the complexity resulting from being unclear at the outset, of the principles and needs of electricity reform that are practical, equitable, and which will work.
We believe that the Minister's intentions as set out in his statement (second reading speech) have not been translated into the provisions of the bill. The artificiality of appearance of the benefits of competition from the highly structured and regulated measures in the bill will soon be captured by dramatic vertical and horizontal amalgamation as industry investment, especially from overseas, will buy up the seriously devalued utilities created by this legislation.
Electricity will join the Railways and telecommunications as just another public-owned asset built up over generations that will see greatly increased profits through restoration of the monopoly; but in private hands overseas, and out of our control.
Lastly, we reiterate our deep regret at the lack of democratic process in the passing of this bill. We, along with many, have not had time to access all of the technical information nor even review our own resources for a more comprehensive and detailed approach in preparing this submission. We deplore the Minister's request for technical information only to be presented, and his apparent rejection of discussion about the philosophical matters behind the formulation of this bill.
We think the bill should be scrapped, and the whole process re-commenced on a proper democratic basis allowing full input from all those with concerns about New Zealand's electricity generation and supply.
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Trevor Reeves, 5 June 1998.
Secretary, Friends of Beaumont Inc.
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