Power groups struggle with industry rules

By BRIAN FALLOW

For over a year the electricity industry has been trying to come up with rules for regulating its affairs that a majority of those involved in the sector can live with.

Despite being told that the alternative is some sort of state regulator they have been unable to reach agreement.

The Commerce Commission is about to deliver its preliminary view of the rulebook produced by the Electricity Governance Establishment committee, chaired by David Caygill.

The submissions it received showed a lack of consensus.

The consumer side of the industry thinks what is proposed as little better than a licensed cartel that would entrench the dominance of the mainly state-owned generator/retailers.

The Consumer Coalition on Energy, representing the Consumers Institute, Business New Zealand, the Major Electricity Users Group and Federated Farmers, thinks consumer interests will be systematically marginalised by the proposals.

It believes a failure to achieve agreement may trigger the establishment of a Crown entity electricity governance board (jargon for a Government regulator), which it thinks would be the lesser evil.

It said consumers and the economy would be placed at considerable risk from an arrangement that gave most decision rights and a power of veto to the supply side.

The largest consumer of all, Comalco, has also said "Count us out".

It regards the proposals as bedding in the existing distortions in the governance of the wholesale electricity market.

Voting rights in the market were supposed to balance the power of the supply side (generators) and the demand side (electricity retailers and major industrial users).

But since ECNZ was split and its fragments gobbled up by electricity retailers, the buyers and sellers in the wholesale market are by and large the same companies and consumers don't get a look in.

The new structure would have an Electricity Governance Board selected by a vote of consumers, transporters and generator/retailers.

But Transpower, operator of the national grid, says the board's "independence" is illusory, given industry parties' rights to override its decisions in critical areas and to appoint and remove board members.

It said the inevitable result of vesting control of industry rules and decision-making in the industry was that it would develop in a less competitive way than it would under Government regulation.

Another critic is Todd Energy, one of the few new entrants to venture into the sector since it was restructured.

It said the rule-making process would be dominated by a few large players and this would restrict small niche players and competitive elements from developing.

The generator/retailers are broadly supportive of the new arrangements, albeit for different reasons and with some reservations.

Contact Energy, for example, said the proposed structure would stimulate investment in the national grid.

"There has been virtually no new investment in transmission in New Zealand for almost a decade," said Contact chief executive Stephen Barrett.

"This is despite strong growth in demand and the increasing emergence of transmission constraints.

"The fundamental reason for inaction has been that investment cannot occur without unanimous agreement by those who will be affected.

"This is too high a threshold for effective decision-making."

Meridian Energy has said that it strongly opposed the proposed rules on transmission pricing.

The Electricity Networks Association, which represents the local lines companies, is "grudgingly' for the proposal, its chief executive Alan Jenkins says.

A primary focus of electricity industry reform since 1987 has been on divorcing the industry from politically driven investment and pricing decisions.

The association fears that having a Government agency directing the industry would eventually mean a return to a regime where pricing and investment were driven by political priorities.

"There are good reasons for people being opposed," Jenkins said. "But they have to face the bottom line that this is an industry with a lot of dominance in it.

"This [the rulebook] at least brings in a bit of cross-industry consultation and oversight.

"It's not a bold leap, but we have had enough of them over recent years."

The Commerce Commission's draft determination should show if it is leaning towards approving or rejecting the application.

It should spell out any areas of concern that it has and put detailed questions to the industry for the next round of submissions. There will also be public hearings in mid-June, before the commission makes its final decision.

A crucial judgment it has to make is what alternative situation would apply if the application were rejected.

The establishment committee in its application argues that the alternative is a Government regulator, and that would be worse.

But not all industry players accept that it is either this rulebook or regulation.

Some argue that although the Government has signalled a willingness to regulate, and has the legislative power to do so, its preference is for an industry solution even if that requires more time.

The Major Electricity Users Group says that setting up a Crown-entity regulator would be a long and difficult process.

"If the commission declined to authorise the rulebook currently before it, what rulebook would a Crown regulator use? Would the Ministry of Economic Development have to draw up a new one?" asked the users group executive director, Ralph Matthes.

Caygill said a difficulty for those who might prefer to see the Government regulate the industry was that it was not clear what form that regulation would take.

Broad principles and objectives had been set but there were no details on what Government regulation would entail.

"If the commission rejects the application or the industry decides not to proceed and we end up with a regulated outcome, it may be one which none of the advocates of regulation have in mind," Caygill said.

In the light of these divergent views, should we conclude that the industry self-regulation model is in trouble?

No, says Caygill.

"It would be staggering if we were all so unanimous that there was nothing to say in front of the commission."

If the commission sanctioned the rulebook the industry would then vote on it and if a substantial majority supported it, the new rules would come into force.

"It is not a process that requires unanimity. It provides several opportunities for discussion and debate, leading to resolution."

Caygill said Transpower had told him that it preferred a regulated outcome but if the rulebook was approved by the commission, it would support it.

* In Dialogue tomorrow, Auckland economist Dr John Small and Meridian chief executive Keith Turner discuss competition in the retail electricity market.