Electricity Industry Bill 2nd Reading Dr Kennedy Graham

This Bill is not the first, and will almost certainly not be the last, piece of legislation that seeks to tinker with the NZ electricity sector.

The generation and transmission, distribution and retailing of electricity has become one of the jabberwockies of the NZ economy.

- The policy developments over the past 20 years reflect deeply held, if dimly perceived, points of economic ideology.
- Their structural implications have made for labyrinthine institutional relationships between entities that pretend to compete and cooperate at one and the same time, since the market signals conveyed by the sedimentary layers of legislation remain unclear on whether they are to compete or cooperate with one another.
- Their retail pricing has become a political perennial in this country, ranking as one of the most sensitive electoral issues each time round.

So it follows that the scope for political points-scoring between the two major parties is at its highest. We have heard, in the 1st reading and now already in this 2nd debate, how National holds Labour and how Labour holds National to account for the 72% retail price hike in a decade, nearly a three-fold greater than the CPI inflation rate.

For many decades until the 1980s, the NZ electricity industry ploughed a contented field of security of supply and relative price stability, rationally-planned transmission and future-oriented generation capacity. This was based on the same power sources we tend to rely on today - hydro, geothermal and natural gas. It was government-owned and operated and hence lacked the sharp-edged prod of private competition. But it had the associated freedom to regard the supply of power to industry, firms and households as a public good. That is a freedom too often dismissed or denied.

In the 1980s, gripped by an excessive dose of ideological fervour, the Labour Government commenced the move to dismantle the public sector's control of the power industry, and shift it towards a mixed, public-private, competitive model. Not to be outdone, the National Government of the '90s furthered this trend, pitting public-owned SOEs against publicly-tradable companies.

The resulting mix has become something of a dog's breakfast over the ensuing years. The 2009 ministerial review was fairly accurate in its critique, particularly the two major problems encountered:
- high retail prices and insufficient competition across regions;
- inadequate security of supply, especially during dry years.

Adding to these sector shortcomings is an institutional criticism - that the governance arrangement is unsatisfactory, with the current Electricity Commission having too many objectives and functions to its name, and not being sufficiently independent of Government.

The current planning process does nothing to assist in clarity of purpose or operation. Most people assume there is a planning process identifying the nature of electricity demand, assessing options available through a cost-benefit analysis followed by a genuine RMA process.

In fact, nothing like this occurs at all. There is no public-interest planning process to speak of. Rather, individual power companies identify generation schemes to maximise profit margins and put these into the RMA process, with no comparable alternative offered. It is possible that an outcome reflecting the public good might emerge, but only by accident rather than design. And the system is heavily biased to think-big style generation, rather than conservation and small-scale distributed generation.

So, today, after 20 years of so-called reform, we probably have an electricity industry that operates more poorly than it did when it was under governmental operation. The continual need to attempt reform of the original changes in the 1980s - continuous through the past two decades - and their continual failure to get to the heart of the problem, provide testimony to this.

So, today, after 20 years, we have a strange economic system for the generation and delivery of power.
- We have essentially five generators, three of which are public SOEs and two of which are publicly-tradable companies. This in itself is guaranteed to distort the smooth operation of a sector.
- We have one entity for transmission, exerting a pure monopoly at that commercial level.
- We have 28 lines companies to distribute the electricity to the retailers. These are owned by trusts or by public companies, except that some major industrial users, for example in the steel and aluminium businesses, are directly connected to the grids and therefore not obliged to bid. The lines companies, however, for the most part possess monopoly control of the services on their networks.
- We then have 12 retailers, five of which are the generators themselves or generator-owned. Seven others are private or local body-owned, but are all smaller in size that the five famously-named 'gentailers'.
- Floating on top of this structural nightmare, we have pricing nodes at over 200 grid-exit points where retail pricing is determined every half-hour over a 24-hour period, and where deals are struck between the generators and the retailers - who are largely the same commercial entities. This vertical integration from generation to retailing allows the gentailers to operate as a natural hedge against any risk of volatility in the spot market. And, also, to ensure that their margins are high no matter what the economic and social stress imposed on the most vulnerable of the end-consumer - the householder.

This bizarre commercial mosaic is the child of two estranged progenitors - ideological rivalry between parties and historical mischance within the bureaucracy. New Zealand's feeble attempts to tame and train the commercial-industrial beast we have created have proved to be just that - feeble.

How to rectify matters? Through forcing the invisible hand, of course. We shall make pricing fairer and more predictable and we shall increase security of supply.

But, how to achieve these two over-arching goals. By telling the invisible hand what to do.

Listening to the pure sounds of perfect competition, the Government is going to intervene in the market and restructure it.
- It is going step in and redistribute assets. It is going to take some hydro-generating capacity away from one SOE and hand it over to another, thereby economically fragmenting a single natural ecological system. The stated purpose of this legerdemain is to increase competition across regions - essentially between the North and South Islands.
- And it is going to further stimulate competition, not just through physical assets swaps, but through virtual asset swaps between the three SOEs, involving a 15-year contract designed to preserve the ability of each to provide increased competition in the island where they currently have little or no generating capacity.

But wait. There is more. There will be a fund of $15 m. over three years to promote customer-switching between retailers. Don't complain about price increases in power, admonishes our Prime Minister, just shop around. Let the market speak. And if it doesn't, shut up and don't bother me.

And all major generators will be required to put in place and accessible electricity hedge market. Yet another example of the free market singing its own praises.

Mr Speaker, there is, of course, absolutely no guarantee that any of this will achieve the two principal goals of price stability and security of supply. Indeed, it these changes may result in so much more stage-managed confusion to the free market as to produce the opposite effect.

I recall the debate in the 1st reading and I have sat through the Select Committee hearings and deliberations. I remain un-persuaded that the Government knows, with confidence, what it is doing with this legislation. It is the product of many bureaucratic minds working at cross-purposes, exposed by a negative Impact Analysis, being hatched under the distant gaze of an unfocused Minister. It guarantees, in short, further poor performance, and further reform efforts.

And at a more underlying level of concern, the Bill simply misses the point. In the early 21st century, what the country needs is not ideological tinkering to restructure a flawed system that is malfunctioning.
- What is needed is a fundamental re-appraisal of the need for greater conservation of use, efficiency of generation and alternative renewable supply.
- We need to be focusing on targeted increases in solar energy, in wind energy, and in tidal energy.
- We need to focus on what market price signal, through a proper carbon price mechanism, is required so that these new sources of power can be enable to flourish, rather than be stifled by more of the same, and silly asset swaps.

Until that happens, we shall be waiting for Godot - whether it comes in the form of Minister Richardson, or Minister Bradford, or Minister Brownlee.

For these reasons, Mr Speaker, the Green Party will not be supporting this Bill.