Electricity Price Review favours scrapping low-fixed charges

Electricity Price Review issues 41 options in second paper release.

An independent panel reviewing electricity prices favours scrapping the government's low-user fixed charge regime, banning the use of prompt-payment discounts, and requiring greater disclosure of the profit split between the retail and generation arms of the major power companies.

But the group, which includes both consumer and industry representatives, has stopped short of seeking caps on retail prices. Nor does it favour requiring the separation of generation and retailing activities, the forced amalgamation of distribution companies, nor a regulated cut in the asset values of the network companies and national grid operator Transpower.

The eight-strong panel, chaired by Miriam Dean, was appointed in April as part of the coalition and support agreements between the Labour, NZ First and Green parties.

It was tasked with assessing whether the electricity market is delivering efficient prices that are fair for end-consumers and whether the existing structures will aid the take-up of new technologies such as solar, batteries and electric vehicles.

In September, an interim report found no evidence that retailers and network companies were making excessive profits, but it was concerned at the level of energy hardship in the community and the development of a "two-tier" retail market in which those with the means and the ability to shop around captured the greatest benefit from lower prices and new emerging technologies.

The 39-page options paper issued today reflects that focus, with the group favouring "as a matter of priority": establishment of a cross-party working group on energy hardship; properly defining energy hardship and its drivers; and the establishment of a network of community-level support services offering advice on budgeting, energy efficiency, and switching.

Voluntary industry standards for vulnerable consumers should be made mandatory and bulk purchase schemes should be investigated for those in social housing or receiving support from Work and Income.

FinCap, a trust that supports about 200 community budgeting services, welcomed the panel's focus on hardship.

Chief executive Tim Barnett says that every year, thousands of people with about $30 million of power-related debt seek help from budgeting services.

"This needs to change," he said. "The power sector and its regulators need to have a consumer voice at their heart. Listening to that voice will mean that priority is given to fair and affordable prices, hardship is handled in a more sensitive and responsive way and emerging technologies benefit all consumers."

Meridian Energy last year scrapped its prompt-payment discounts in a bid to deliver fairer tariffs. The change cost it about $5 million.

Today chief executive Neal Barclay welcomed the panel's recommendation to scrap the discounts. Were the rest of the industry to follow Meridian's approach, consumers could save about $45m a year, he said.

In all, the group canvassed 41 options on everything from retail pricing to data access and regulatory reform. It was undecided on five of them and not keen on six.

As it signalled in September, the panel says the low fixed-charge regime introduced in 2004 by the then Labour-led government is poorly targeted and exacerbates hardship for large, low-income families.

It favours phasing out the regulated charges from 2020 so that retailers and distributors have time to develop tariffs for low-users that more accurately reflect the cost of supplying them.

The panel wants to see prompt-payment discounts - which they believe disproportionately hurt low-income consumers – banned. Late-payment fees, and discounts for bundled services and direct debits would be allowed but would be capped at the actual cost or saving to the retailer.

It also wants win-backs – in which retailers go back to a customer they have 'lost' to a competitor and make a better offer – banned. While the Electricity Authority and many retailers believe individual customers have ultimately benefited from the resulting lower prices, the widespread practice has slowed the growth of some new-entrant retailers.

The panel noted that the identical practice is banned in the telecommunication sector and may be contributing to the 'two-tier' nature of the market.

To encourage greater competition in the wholesale power market – which new entrant retailers rely on for their electricity supply – the panel wants to make mandatory the voluntary market-making services the major generators provide for the ASX futures market.

The panel says the existing arrangements – which tend to stop when the market is stressed by low lake levels, gas shortages or plant outages – are too fragile.

It stopped short of seeking the separation of firms' retailing and generation activities but wants to see greater disclosure of information on fuel and plant outages that could affect wholesale prices.

It highlighted high power prices late last year – which are already the subject of complaints by smaller retailers to the Electricity Authority – as an example. Many in the sector appeared to have been unaware of looming cuts to gas supplies from the Pohokura field.

The panel says the Electricity Authority should be vigorously enforcing the disclosure rules as they exist and has suggested also giving the authority the power to monitor wholesale prices against actual costs in the sector.

It also supports the authority's efforts to require network companies to offer standardised terms for retailers and its efforts to ensure easier access to smart meter data.

"This should be finalised quickly," the panel says.

Network companies are currently reviewing their tariff structures to help enable new technologies like solar, batteries and electric vehicles by sending the right price signals to consumers on when to draw power from the local lines, or inject it into the network.

The panel has suggested a government policy statement on distribution pricing may help ensure that the industry manages that change in a phased way that reduces the impact on households, particularly those in hardship.

It is also considering whether a similar government policy statement would help shape the authority's thinking on the final form of its proposed transmission pricing model.

The authority and its predecessors have spent more than a decade reviewing transmission pricing. It aims to complete a final proposal mid-year that would include a benefits-based charge. That would reduce South Island consumers' contribution to major North Island transmission projects, but could also increase costs for more remote regions like the West Coast and Northland.

The panel is undecided whether the government should be able to direct an independent agency like the authority on such an issue. But it thinks central government should be able to express a view and could play a role ending the "costly and contentious" debate so far.

"We think the extent to which transmission or any other shared national infrastructure prices should vary between users or regions is best settled with clear guidance from elected governments."

Submissions on the paper close on March 22. The panel will make a formal recommendation to the government mid-year.