Electricity retail competition is flourishing
AUCKLAND SUB-CENTRE
OF THE
INSTITUTION OF ELECTRICAL
ENGINEERS (IEE)
An Address delivered on behalf
of
Hon Max Bradford
Minister for Enterprise and
Commerce
Minister for Tertiary Education
Enterprise
and Innovation Ministerial Team Leader
Breakfast
Meeting
Ellerslie Convention Centre, Auckland
7.30 am,1 September 1999
Good morning, and thank you for
inviting me to speak today.
Your invitation gave me broad
license to speak about “some aspect of the power industry in
New Zealand.” The aspect I’d like to focus on is
competition.
Electricity retail competition is
flourishing
When you look at the electricity industry in
New Zealand today, it’s hard to believe how far we’ve come
in such a short time.
The Electricity Industry Reform Act
came into force just 14 months ago. The past 14 months have
been a period of unprecedented change for the
industry.
Separating the ownership of line and supply
businesses has unleashed forces of competition which had
been kept in check even after power companies were put on a
more commercial footing and deregulated in the early
90s.
Before ownership separation, retail competition was
a non-event.
The Energy Companies Act, which set out to
commercialise the electricity industry, was introduced in
1992. Six years after the starter’s gun went off,
competition was still in the starting blocks.
The
Government had to act.
This Government stands for
competition in business, free of Government meddling, but
our patience with the electricity industry ran out.
In
April 1998, when the shape of the reforms was announced,
something like 10 percent of consumers could switch power
companies.
Now, over 60 percent of consumers have the
choice and chance to get competitively lower power
prices.
Now, 14 months on, competition is
flourishing.
Let’s take the Ellerslie Convention Centre
for example. This building - like all the other buildings
in this area - is hooked up to Vector’s network. If you go
into the Consumers Institute PowerSwitch website
(http://www.consumer.org.nz/), or call PowerSwitch’s 0900
number (0900 769-370), you’ll find that consumers supplied
via the Vector network have a choice of 5 retailers. 5
retailers. And if you have a time-of-use meter, you may
find one or two more knocking on your door.
What’s more,
switching from one retailer to another should be simple, and
cost little or nothing.
Compare that to the situation 18
months ago. Frankly, there is no comparison.
To be fair,
Auckland consumers have greater choice than most. As you’d
expect in a competitive market, the greatest competitive
activity occurs around large users and large concentrations
of users.
But competition does not stop at the Bombay
Hills. And you don’t have to be a 200,000 kilowatt-hour a
year consumer to have a choice of supplier.
Look at
Marlborough, for example, where newcomer Meridian competes
with Trustpower, which bought the separated retail business
from the incumbent power company.
Marlborough is a quite
different area in many respects from highly urbanised,
densely populated Auckland. It has a relatively high
proportion of rural consumers, and few of the big energy
users that proliferate in Penrose and other parts of
Auckland. Despite that, consumers in Marlborough have a
choice of retailer.
One of the reasons for my optimism is
the dynamic state of the electricity retail industry. A
significant new retailer was launched last month. Fresh
Start is beginning its bid for business across Powerco’s
network in Taranaki, Wanganui and Wairarapa. Once they gain
a foothold, I expect they will follow the example of other
retailers and cast their net wider.
Fresh Start will not
be the last retailer to enter the market.
There are areas
where head-to-head competition has not emerged, but
competition is spreading and I expect that all areas will
benefit soon.
We are seeing innovative marketing
strategies like Meridian’s link with Sky Television to offer
discounted Sky subscriptions. If you join up to Sky, you
can opt to have your electricity supplied by Meridian
anywhere in the country. In a limited sense, then, almost
everyone in the country has a choice of electricity
supplier, even if Meridian is offering to match consumers’
best deal current electricity prices.
But if we only
think of competition as two or more retailers competing for
consumers who are connected to a particular network, we miss
a whole dimension of competition.
Something that’s
particularly pleasing for me is that the development of
competition is not just about retailer push. There are
examples of consumer pull as well.
I’m talking about the
trend for businesses with operations in many parts of the
country to buy electricity from one supplier. New Zealand
Dairy Group, for example, has cut a deal with First Electric
that is earning up to 15% savings for over 9000 dairy
farmers in the Waikato and Bay of Plenty.
The best-known
of the consumer groups is “The Power Club” – a joint venture
between Federated Farmers and The Energy Group Limited to
earn savings of up to 10 percent on bills.
These examples
of developing retail competition are not exhaustive. Nor
are they the end of the story. Remember all this has
happened since around April this year. It’s still early
days in the development of a competitive electricity retail
market.
I said it would take 12 to 18 months for
electricity price competition to develop fully. We are well
on track to achieving this.
The experience in other
countries where retail competition has been introduced –
such as the UK and Norway – is that quite a small number of
consumers actually switch retailer. Around 5 percent in the
first year.
In the five months following the introduction
of low-cost switching, I understand at least 25,000 New
Zealand customers switched retailer. That’s nearly 3
percent of all the consumers who have a choice of competing
price plans from competing retailers.
If that switching
rate continues for 12 months, it will produce a rate for the
year of over 6 percent. That means our rate is in line
with, or perhaps a little higher than in those other
countries.
There are two messages you should take from
this.
If you haven’t reviewed your electricity supply
arrangements, you should.
And if you haven’t negotiated a
better deal with your existing supplier or a new one, then
you’re almost certainly missing long-term cost-saving
opportunities at home and at work.
Wholesale electricity
market maturing
The wholesale market had a head-start on
the retail market.
But we saw problems there with so much
of the market supplied by one generator.
The split of
ECNZ into three companies balances the generators’ market
much better. And the sale of Contact Energy to the private
sector allows the state-owned generators to benchmark their
performance against an investor-owned generator.
The sale
to Edison Mission Energy – plus thousands of ordinary New
Zealanders - has important spin-offs for the Government’s
wider fiscal management. That money can be invested in our
future.
The Electricity Reform Transition Unit - when
it presented its final recommendations on the split of ECNZ
– said it expected average wholesale prices would be between
14 and 20 percent lower on average as a result of the
introduction of vigorous competition.
Wholesale prices
have, in fact, fallen by 50 percent on average since the
beginning of April 1999.
Wholesale prices are obviously
affected by weather conditions and hydro lake levels, as
well as the reforms. Lake storage levels are currently
running slightly below the historical average, but not
dramatically so. It seems fair to conclude that the current
very low wholesale electricity price is a sign of vigorous
competition. So, while it is early days, it appears we are
reaping the gains expected from the generation
split.
Having said that, these prices are probably not
sustainable at these low levels. But it does seem that the
Transition Unit’s prediction will be achieved, and may even
prove to be conservative.
Distribution line businesses –
unfinished business
While it is easy to reflect
positively on developments in wholesale and retail
electricity, I still have concerns about line
businesses.
Consumers are almost certainly paying too
much for the conveyance of their electricity. Some of my
concern stems from line business valuations, which many of
you in this audience probably have a direct hand
in.
Continuing increases in ODVs allow line businesses to
increase prices without raising profits to levels that might
attract regulatory attention. Over the years, some ODV
valuations have lacked rigour, and Government officials have
been forced to continuously tighten the ODV methodology.
The Ministry of Commerce is right now in the process of
reviewing the methodology again.
The defining event came
in the course of ownership separation, when power companies
sold functions such as meter reading and associated assets
without reducing line charges to reflect their new lower
cost structures.
At that point, the Government
reluctantly concluded that price control must be
imposed.
It must be clear from this Government’s track
record in promoting competition over our years in office
that price control is not our weapon of choice.
We are
prepared to use it, however, in the face of line company
intransigence, and the clear lack of the sorts of incentives
you find in competitive markets to minimise costs and lower
line charges accordingly.
We are prepared to use it to
make sure that consumers – at home and in business – reap
the full benefits that the electricity reforms have to
offer.
We are prepared to use it. But our political
opponents – Labour, the Alliance, ACT and New Zealand First
- have blocked the legislation that would allow us to take
action. Those parties show disregard for the needs of our
homes and businesses. They have come down on the side of
monopolies, not consumers.
Nevertheless, I have no doubt
that, one way or another, we will see price control imposed
on line businesses in the not-too-distant future, whatever
the outcome of the general election.
That is some small
comfort.
By then, it will be too late to wind back this
year’s line charge increases. Consumers will be the losers.
That lost opportunity is frustrating to the Government.
More significantly, it is an unnecessary cost to New Zealand
businesses and households.
Ongoing benefits of the
electricity reforms
Price control is a significant piece
of unfinished business. Putting it in place will bring real
pressure to bear on line business costs for the first time
ever.
Given that distribution line business charges make
up about 40 percent of the final bill, they have to be the
focus of government’s attention. Transpower’s prices are
also an important factor, and there the Government can
maintain pressure through ownership as well as price
control.
The wholesale market has coped well with the
changes brought about by the latest reforms. The market
boasts more depth and breadth today than it did prior to the
ECNZ split.
Doomsayers predicted that the wholesale
market would struggle once generators were freed to sell
electricity to consumers of any size. That has not
happened. And won’t happen.
To many consumers, though,
the wholesale market is a mystery. What’s real to these
people is their power bill.
I congratulate retailers for
taking the opportunity presented by the reforms.
I
encourage them to push, to compete, to innovate.
I can
assure those retailers and their consumers that this
Government will continue to put pressure on line charges to
ensure that we deliver the full benefits of the reforms to
everyone.
Thank you for your attention. I have time for
a few
questions.
ENDS