Electricity Industry Bill

I am pleased to speak in the Committee stage of the Electricity Industry Bill. There is absolutely no evidence that introducing further competition and asset swaps will tackle the huge price variance between domestic and industrial power users. Despite this Government’s pre-election promise to lower power prices, National has seriously taken its eye off the ball. New Zealanders want to pay lower power prices, and they were led to believe that National would deliver affordability. The Government has said the legislation means there will be more competition and more stability in the electricity industry. Although there may be a bit more competition happening right now, stability or affordability is certainly not happening in the electricity industry. Essentially, the effect of this legislation is to make things worse for the vast majority of New Zealanders, such as the families who are struggling to make ends meet and our senior citizens who are living on fixed incomes, and all the while their electricity prices continue to go up.

As members have heard, Labour does not support this bill. It has not supported this bill at any stage. Thousands of New Zealanders are currently feeling the squeeze when paying their electricity bills, and they will not receive any help from the Government’s electricity market review or this bill. In fact, things will just become worse for them. After promising that the Government would take action, the Prime Minister has offered very little to help New Zealanders who are finding it difficult to pay their energy bills when their family budgets are so tight. That is about to get added to by the 2.5 percent GST rise, and by allowing companies to use the emissions trading scheme as an excuse to price gouge between 5 and 10 percent, with nothing but a meek warning. National promised it would do everything it could do to take the sharp edges off the recession and help struggling Kiwi families. But the Government’s electricity market review and the bill miss the point. Nowhere in the overview of the bill does it even mention constraining or reducing prices.

Any reforms of the electricity sector need to deliver, as members have heard, on three priorities: sustainability, security of supply, and affordability and predictability of prices. These reforms do not go any way towards addressing any of these priorities. Nor do they give us any clue as to how to balance the competing considerations at stake. Transferring assets between power companies and reshuffling the bureaucracy is just smoke and mirrors, which does not guarantee any immediate relief for Kiwi power users.

I will refer back to what the Government said it wanted to achieve with this bill, which was more competition and stability, and I will talk a little about Dunedin, which is one of the coldest places in the country during winter, so electricity bills are quite high there. I will refer to an article in the Otago Daily Times last Friday that reported that Contact Energy lost more than 2,000 Dunedin customers in the same quarter that it controversially hiked prices up by more than 9 percent. It had 47 percent of the 50,000-plus market, or more than 24,600 customers, in the May quarter. At the same time that Contact Energy increased its prices by up to 9 percent, the Prime Minister and the Minister of Energy and Resources warned companies not to use the emissions trading scheme as an excuse for price increases when they learnt of its review in June. Contact Energy said at the time there were actually two increases: a Dunedin-specific 6 percent increase to reflect the cost of generation and supply, and a nationwide 3.2 percent increase to meet the costs of the emissions trading scheme. Meanwhile, at the same time Mercury Energy increased its prices by 3.3 percent. Just over a week ago, Contact Energy announced that it would increase its prices again when GST rises on 1 October.

I want to address a couple of things that came up in the previous discussion, on clause 3, and are being repeated in debate on this part of the Electricity Industry Bill. Firstly, the Labour Opposition says it has concerns around security of supply, prices, and sustainability. In looking at those three things, I say that this review of how electricity is governed and the regulations around the production and sale of electricity comes on the back of a period under the previous Government where we had several electricity crises—

💬 Chris Hipkins: It didn’t rain.

—during so-called dry years. The one thing that is really interesting to me is that we never ran out of electricity during that time. That raises the issue as to whether the way in which the governance of the sector and the views on the worth of the water and of storage were being properly considered. That is why the Government has looked at asset swaps to get a different view. That is why we have looked at virtual swaps of large tranches of electricity and that is why we are looking at having a more liquid hedge market.

On the issue of price, I make it very clear that I have never at any point said—and no one will find a quote from me saying—that we will bring electricity prices down. I have repeatedly said that we will get a more stable price path for electricity. One thing I point out is that in the May 2009 to May 2010 year, the average electricity price rise was 2.9 percent. That compares to over 8 percent for each of the previous 8 years under the previous Government. I think there is a very good trend there.

With regards to the situation in Dunedin, I simply say to Dunedin residents that if one company is jacking up its prices through the roof, they should look around and see who is not. There has never been more choice for people in that city than there is at the moment. That choice is driven directly out of the ability of Genesis Energy to ensure its own supply into that market.

On the issue of sustainability, I say that we were recently able to report once again that New Zealand is enjoying the benefits of very high levels of sustainably produced electricity—73 percent in the latest Energy Quarterly. I concede that part of that is because of the commitment to thermal generation—

💬 Hon David Parker: Geothermal.

—geothermal generation made by the previous Government; the former Minister of Energy is right to correct that. But it is also worth pointing out that at Huntly at the moment coal is being replaced as a fuel with gas, which is having a very positive effect on reducing emissions from that important piece of kit in the New Zealand electricity system.

The question was raised about this bill not dealing with prices. Well, the members who raise that question totally failed for a very long period of time to deal with outrageous prices. This bill at least creates an environment where there is pressure on retail sales, where there is the ability for others to enter a market, and where there is capacity for companies to secure a supply that means they can meet their consumers’ demands.

The Electricity Commission was set up by the previous Government and was required to do a broad range of things. The Electricity Authority, set up by this bill, has a much smaller range of things to do, and I think that is appropriate. One of the most important things it will do is make rules. One of the failures I saw in the system was that Ministers were required to sign off on rules. Quite frankly, few Ministers have the time to read those rules, let alone understand what they are about. I think having an authority that has a better focus on that will see us with a better, surer, and more secure arrangement.

I might also say that the issues raised about energy efficiency are important. I can say two things there. Firstly, the current Government has funded the Energy Spot on national television. It runs many times during the week and gives people practical tips about how they might reduce their energy bills. Further, we have committed a large tranche of funding to the home insulation programme and the Clean Heat programme, which are seeing literally tens of thousands of New Zealanders in warmer, drier homes, where energy efficiency will be much improved.

I also say that the funding flow is now to the Energy Efficiency and Conservation Authority. The authority will be required to engage in a broader programme for getting a better approach to energy efficiency. One of the things I hope it will pick up very quickly—it is a little outside the purpose of this bill—is the issue of industrial use of electricity, business use of electricity, and commercial use of electricity, where a possibility exists, I am told, for very, very substantial savings in the amount of energy this country uses. I do not discount the idea of a notional power station that indicates to people on a year-by-year basis how much efficiency we have managed to get across the country. I think it is extremely important, and taking that role away from the Electricity Authority, formerly the Electricity Commission, and putting it with the Energy Efficiency and Conservation Authority will give the public a great deal more confidence about the information that will be provided to them.

I raise the issue of the emissions trading scheme. Although some power companies may have suggested that the emissions trading scheme is the reason for their price hikes, I have repeatedly said that I think that is unreasonable. The fact is that 73 percent of electricity sold in this country in the last quarter was generated from renewable sources, and around 25 percent of that was from thermal. That indicates that there is a much lesser draw on the requirement. The Government has capped the price of carbon dioxide emissions at $25 a tonne, effectively meaning that industry pays half of the cost, which is $12.50. The average price appears to have been something between $18 and $18.50 recently, which puts it back to $9. I think the costs that some companies are applying are excessive, and we have said that we will want to have a good look at that as we go forward.

I note that we would have a long way to go to use up on electricity charges the $100 a week extra that superannuitants are now getting since this Government was elected than was the case under the previous Government. Although Ms Curran might be concerned about one company jacking up its prices by 9 percent in one part of the country, 9 percent was the average price increase for 8 years. Not only was the price going through the roof but also we had so-called electricity shortages. Although I admit that some of that shortage was due to the hydrology, it was not at the frequency that we saw over those years. That is why we are looking at the issue of asset swaps and that is why we have looked at virtual swaps among those companies, so there are balanced obligations. It finally means that what should have been in place for years between the very large hydro generator in the South Island and the very large thermal generator in the North Island is being put in place. There is plenty of evidence that those swaps will create a more secure environment.

I think it is unreasonable to suggest that the Crown may not be capable of being bound by this bill when, clearly, the previous Government had absolutely no evidence to suggest that it was bound by previous Acts. None of the predictions that were made by previous Ministers came to pass. I can at least say that since we started down this process, things have greatly improved for consumers. That is a completely unarguable position. I look forward to reasonable discussions about the way in which aspects of this bill might be applied, but I think in a general sense suggesting that everything was better the way it was before is a completely wrong position. If the Labour Party wants to argue that we should have done nothing and just carried on the way things were, then it is saying that New Zealanders were condemned to 9 percent and 10 percent price rises per annum for their electricity. We have rejected doing that and have had a bit of a go at seeing whether we can straighten things out and get a better and more reasonable arrangement for the way that electricity is marketed and sold.

There is no backing off the idea that the best form of investment should be chosen every time. At the moment we are seeing that the best form of investment appears to be in geothermal energy; we certainly encourage that. But I would not in any way want to take away the opportunity for electricity companies to look at gas where it is needed. A number of projects are on the books. I hope that they are developed, because gas has a much lesser carbon profile than coal, and it provides very fast, instant back-up to the system, particularly where we have wind energy, which may drop off very, very quickly. Having an over-reliance on that particular fuel source would be a disaster for New Zealand consumers. It has its place.

Before I call the next speaker, I remind members that although a range of bills have gone through on wide-ranging debates, this bill is not one of them. We have had two speeches from either side and I think that is fair enough to set the scene. We have had one excellent example of how one focuses on the material and introduces other points, but we are on Part 1, which consists of technical aspects of the bill. I expect the speakers from now on to stay within the Speaker’s rulings and Standing Orders for the Committee stage of a debate.

Absolutely, Mr Chairman. I refer to clause 4, “Purpose”, which states: “The purpose of this Act is to provide a framework for the regulation of the electricity industry.” The Minister in the chair, the Minister of Energy and Resources, gave a well-meaning but useless speech in the Chamber and, I have to say, he has done it before. I recall that Minister making such a speech, or a similar one, anyway, with good intent back in the 1990s. The question I ask of him is where “Mad Max” is.

💬 Dr Rajen Prasad: Who?

Max Bradford started this whole thing. This is about managing Max’s mad markets, quite frankly. Max Bradford said that the markets, with very little regulation, would deliver long-term, secure, and cheaper electricity for this country. I can remember the Hon Nick Smith stating in the newspaper in Nelson that he would bet a bottle of wine with me that prices in electricity would come down. I am still waiting for the wine.

The reality is that the Government has at least acknowledged that it needs regulation to improve the situation. The previous Labour Government tried, but we failed, I have to say. We did not do what was necessary, because we were trying to put Humpty-Dumpty back together again. The integrated electricity system that we had in this country was disintegrated by Max Bradford on the basis that the market and competition would deliver more efficiency, more security, and cheaper electricity into the future. It may have been the same officials then who are here now—I am sorry; I do not want to unfairly bring the officials into it—but we have to realise that we have a disintegrated market, which has failed time and time again.

The basic problem is that if one is a generator and no further investment in generation occurs, then demand, as it continues to increase, will simply drive up what one gets for one’s existing generation. It makes good business sense. So why, then, does one invest in new generation until one reaches a point at which there seems to be a bit of market reaction? People start to get agitated, or the Government gets agitated, about the price they are paying for electricity.

We accept that electricity prices went up too much under Labour, because we were trying to tinker with a failed market model, and now the National Government is trying to do the same thing. That is why Labour does not support this bill. Labour does not support this bill for a whole lot of reasons, and we have a whole lot of speakers here who will go through those.

The purpose of the bill is to regulate the electricity market. It is a huge step forward for the National Government, from Max Bradford, and it is a huge step forward for the Hon Gerry Brownlee, who was a member of the Government that deregulated the electricity industry in this country. It has failed to deliver security of supply. That deregulation has failed to deliver efficiency gains, which we see from time to time. It has failed to deliver affordable electricity to many, many New Zealanders. There are elderly people in their homes today who refuse to turn on their heater. They are freezing in their homes because they are scared of what they have to pay for electricity. That is a failure. It is a failure of our system, which should be integrated and should have moved further down the renewables path.

We are lucky that we have a big chunk of electricity generation from renewables, but, of course, Mr Brownlee is absolutely committed to digging up more coal from the national parks, although he has backtracked on that for a moment, and to using thermal generation to drive electricity generation forward even further. Well, rather than celebrating the switch from coal to gas, I ask whether we should not be going further into renewables, such as more geothermal—which he mentioned—more wind, and more hydro. I suggest there are many, many ways that we can progress without using gas, which should be used for far more productive uses in this economy.

To go back to the bill—because, Mr Chair, I accept your guidance—the Minister referred to Dunedin. One swallow does not a summer make. Dunedin has always been held up as the fine example of what competition can deliver to consumers. Well, not many other consumers around the country have had the benefits of any true competition.

💬 Hon Gerry Brownlee: Yes, there are.

No, there are not, I say to Mr Brownlee, and he knows that.

I will first state my agreement with the Minister in the chair, the Minister of Energy and Resources, in respect of his comments about the effect of the emissions trading scheme on power prices. I agree with him that the emissions trading scheme has not been responsible for all of the power price increases that we have seen. We know that partly because, at least in theory, the electricity price is driven by the long-run marginal cost of new supply. The long-run cost of new supply in the electricity system has long foreseen the cost of carbon coming. Indeed, when I was the Minister some years ago, Contact Energy told me that it had already factored into its investment decisions—and, indeed, into its share price—the effect of the cost of carbon on electricity prices and investments. So again, I agree with the Minister that although the increases of late that have been blamed on the emissions trading scheme are partly a consequence of that, they are also partly not.

Of course, that begs the question that if it is not all related to the emissions trading scheme, then what is it related to? The answer to that question is perhaps that there is insufficient competition. The purpose of this legislation is set out in clause 4 as: “The purpose of this Act is to provide a framework for the regulation of the electricity industry.” The reason that we need a framework for the regulation of the electricity industry compared with other goods and services that are supplied, particularly when it comes to the way in which electricity is delivered, is that the market has severe constraints and it is arguable that it is not competitive enough. That is why the Government intervenes and, therefore, regulates the market to try to enhance competition.

The question we have to ask in New Zealand is whether, after the years since we had the so-called market reforms that were pushed upon the country by Max Bradford originally, there is sufficient competition to justify competition being the control on price. If there is insufficient competition to control price, then we have to give up on having the competitive market as the appropriate way to control price, because it is a fiction, and what lies behind that fiction is excessive pricing.

We have heard from Clare Curran about the example she gave in Dunedin. Before I move to that, I say that one thing the Minister ignores in respect of the prior decade is that the major driver of the increase in electricity prices in New Zealand was the Māui gas running out. Māui gas was subject to a price control that went back to the Muldoon Government. As the gas ran out, there was the need to remove the cap on the price of gas so as to encourage more exploration, and that was actually the main driver of price in the early to mid-2000s. It does not explain increases in price since that date, and real questions remain as to whether the market is sufficiently competitive. What is driving the Government’s behaviour now is that it has a desire for dividends from State-owned enterprises.

The Government is not interested in real competition. It is not interested in real controls on an appropriate price for electricity. What the Government wants is dividends and capital distributions from the State-owned enterprises to the Government’s coffers. We know that because the Government has been open about it. The Government said that one of the things it wanted from the State-owned enterprises was improved financial performance. The only way we can get any significant change in the financial return from the major electricity State-owned enterprises is to put up the price. If the price is put up, a higher profit is made and therefore a higher dividend can be paid to the Government. Please do not pretend that it is anything other than that.

In respect of whether there is proper competition, I am just about ready to conclude that there is not. No one can explain the enormous differential between industrial and residential tariffs in New Zealand. It is higher than anywhere else in the world that I know of; there is an enormous difference. I think that is very good evidence that there is not sufficient competition at wholesale and retail level in residential markets.

I will give another example of where this is bad. Alexandra sits next to one of the biggest hydro facilities in New Zealand—the Contact Energy dam on the Clyde River. Alexandra pays one of the highest electricity costs—

💬 Jacqui Dean: It’s the Clutha River.

What did I say?

💬 Jacqui Dean: The Clyde River.

Sorry, it is the Clutha River; the member is quite right. I meant the Clutha River. The Clyde Dam sits on the Clutha River. Despite that, the people of Alexandra pay a far higher price for their energy than just about anywhere else in the country. I am not talking about line charges. I am talking about the energy charges. This dam is close to Alexandra, and just down the road is the Roxburgh resource, yet they pay a higher price for electricity. This legislation will not change that at all.

The question was put that the amendment set out on Supplementary Order Paper 154 in the name of the Hon Gerry Brownlee to clause 5 be agreed to.