Electricity Industry Bill: a travesty of natural justice

The Electricity Industry Bill is a travesty of natural justice. It excludes domestic consumers, who pay nearly half the electricity industry revenues, from any role in the Electricity Authority that is to govern the industry.

This Bill is more brash than Brash. Its neoliberal philosophy comes directly from the Commerce Act 1986 and State Owned Enterprises Act 1986.

The vision of those laws is that industry maximizes its profits and regulates itself. The consumer is protected only by whatever competition may emerge.

Subsequent laws added the moderating principles “fair” and “environmentally sustainable”. But submissions referring to those principles have been consistently rejected.

The new Bill would codify in law the extreme practices that have driven domestic power prices sky-high, while producing lower prices for major commercial users.

The golden rule

As Professor Wolak’s analysis of the industry showed, the companies take every possible opportunity to maximize their profits at the expense of consumers.

The job of the new Authority is to make the market rules, now called “the Code”. Only Industry Participants are allowed into this self-regulating club. The Code will indeed be the Golden Rule, because “He who has the gold makes the rules”.

Central Government is deeply in league with Industry Participants, because Government owns two thirds of the industry’s assets - Transpower, Meridian, Genesis and Mighty River Power. Profits go direct to the Consolidated Fund, and rising asset values will support the privatization agenda.

Domestic power price rises are therefore a tax by another name. This is worse than a flat tax – it is effectively a poll tax that no domestic consumer can avoid.

This Bill ensures that Domestic consumers – voters – cannot influence the level of that tax.

It specifically confirms that even for pricing by monopoly businesses, the Commerce Act:

“does not allow for constraining price increases to particular classes of consumer for fairness or equity reasons.”

Since 2000, the Government’s overall objective for electricity supply has been:

"to ensure the delivery of energy services to all classes of consumers in an efficient, fair, reliable and sustainable manner."

The new Bill specifies that “fairness” will be decided by the Minister of Energy, and “environmental sustainability” will be decided by generic resource management law.

Minister Gerry Brownlee said when he announced the Ministerial Review decisions:

"I'm particularly attracted to the idea of requiring generators/retailers to compensate consumers in the event of conservation campaigns. This . . . means the risk of dry years will be diminished because power companies will be hit in the pocket when this occurs.”

But the facts tell a different story:

• The Wolak Report found that in three dry years, gentailers made $4.3 billion excess profits – around $1.4 billion in a typical dry year event.
• Compensation is proposed of $10 per week for each of 1.6 million domestic consumers.


• If a shortage is very long – for example, 2 months - the compensation payment would be $128 million.

So the payout would be less than 10% of the profits made by gentailers if they engineered a shortage through the perfectly legal exercise of market power.

Gentailers have deep, deep pockets and can withstand financial ups and downs. It is the independent retailers, who might provide a better deal for domestic consumers by accepting low margins, that would be driven out of the market by the risk of compensation payments.

So much for Brownlee’s headline, “Energy sector transformation to benefit consumers” – it echoes Max Bradford’s botched restructuring of 1998.

The Bill does not actually address the ever-increasing gap between power prices to residential and to non-residential consumers? It is based on the Commerce Act which has no interest in prices as such. It doesn’t care whether prices reflect actual cost of supply, or only the (legitimate) exercise of market power.

The new bill specifically says that any pricing methodology developed by the Electricity Authority will override any methodologies approved by the Commerce Commission. The Golden Rule again – Industry Participants will be able to override pricing rules made under the generic Commerce Act.

The existing Electricity Commission promotes “Ramsey-compliant pricing”, where consumers who are captive to electricity pay the highest prices, and the most competitive pay the lowest prices.

Following a passionate attack against Ramsey pricing at an Electricity Commission workshop held to discuss distribution pricing methodology, the Commission now proposes to drop the term “Ramsey compliant” - but to retain the principle without naming it.

By contrast, major electricity consumers, who buy directly from the wholesale market, will be able to negotiate their prices downwards, and better manage dry year and other risks. They are very happy with the new policies.

It is domestic consumers and other mass-market consumers who will suffer in the proposed unmitigated market pricing system.

ENDS

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