Business 2000: Consumers waiting to see power reform light

A former minister copped most of the blame while the power industry still failed to endear itself to its customers. RICHARD BRADDELL sums up the year's moves.

Electricity consumers are justified in wondering what the point of all the restructuring has been.

Twenty months after the electricity lines companies were split from the retail operations, electricity prices have gone up close to 4 per cent and stories abound of untoward delays in transferring customers to new suppliers, and of disconnections and bills that were wrong or never arrived.

Too often, consumers who took advantage of competition found that it was less than a good thing.

The blame for this chaotic state of affairs is usually sheeted back to reforms introduced by former Energy Minister Max Bradford when he separated the lines companies from the energy businesses. But while it might be argued that the same result could have been achieved by less draconian means, it was at least an attempt at a structural solution to overcome what appeared to be anti-competitive cross-subsidisation of energy trading from the monopoly lines businesses.

At least one prong of Mr Bradford's reforms, breaking up the state generator ECNZ into three competing generators, succeeded in driving down the wholesale price of electricity, though little benefit found its way to consumers.

But if Mr Bradford's efforts seemed impetuous, his was also an heroic attempt at addressing several years of half-hearted reform which too often seemed weighted towards preserving jobs for the boys. Furthermore, time was not on his side as the electoral cycle marched on.

A key component in Mr Bradford's policy, which he was unable to implement, was constraints on the new lines companies if they chose to price-gouge from their monopoly position. The suspicion, albeit hard to prove conclusively, is that the lines companies have been soaking up the gains consumers might have expected from lower wholesale prices.

Mr Bradford's solution, to introduce price control in the form of a blanket consumers' price index minus a factor of x (CPI-X) formulation, was rejected by all the other political parties, which felt the matter needed further investigation and had secured agreement from the lines companies that they would not raise prices for a year.

Incoming Energy Minister Pete Hodgson used this breathing space for the Caygill Inquiry into Electricity, whose recommendations formed the basis for the new Government's policy, announced in October.

Legislation supporting those recommendations was introduced to Parliament in December and the Government hopes to have it in place next autumn.

Essentially, the industry will remain self-regulating, although Mr Hodgson and the energy ministers who succeed him will have strong reserve powers to intervene and the Commerce Commission will be given express powers to implement price control on the lines companies if necessary. On the self-regulatory side, a new Governance board, whose rules will be binding on generators, distributors, Transpower and retailers, will replace the three bodies that manage the industry, and there will be an industry ombudsman.

But the centrepiece of lines company price control that eluded Mr Bradford will take longer.

The difficulty with the lines companies is that measures of the reasonableness of their profits are done by comparing them as a rate of return on their valuations.

Although the Ministry of Economic Development has revised its methods of valuation, there is still little confidence that the valuations are strong enough to prevent the lines companies from manipulating them to justify higher prices.

Under Mr Hodgson's policy, the lines companies have been called on to foot the bill for the $2.2 million cost of a recalibration of their valuations.

The commission, which will have responsibility for these matters, is now engaged in an exhaustive review, with issues and discussion papers likely in March.

It is also engaging consultants and is seeking proposals on pricing control and asset valuation methods, with the prospect that the CPI-X formulation might be but one of a battery of possible approaches.

If consumers are disillusioned about the prices they are paying, and their treatment in the new market, it has not deterred them from seeking a better deal.

Customers are switching suppliers - about 200,000 in the second half of the year, compared with 107,000 in the first 14 months of the market.

Herald Online features:

2000 - Year in review

2000 - Month by month

2000 - The obituaries