Electricity Issues

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Electricity Issues
Alan Jenkins - ETNZ Conference May 2006
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Paradoxes of Regulation

• The Commerce Commission is now targeting line
  charge cross-subsidies
• The Government expects distribution companies to
  keep any changes to rural line charges in line
  with urban line charges. The Electricity
  Commission should monitor developments in rural
  charges. Govt Policy Statement on Electricity
• The Transpower Pricing Methodology, administered
  by the Electricity Commission, requires all
  electricity distributors to cross-subsidise
  remote generators transport costs to markets.
• The Government requires lines companies to offer
  a variable pricing option to domestic consumers.

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.Paradoxes of Regulation

• The MED is proposing only limited reform of 1998
  ban on linecos generating
• The purpose of this Act is to reform the
  electricity industry to better ensure that
• (a) Costs and prices in the electricity
  industry are subject to sustained downward
  pressure and
• (b) The benefits of efficient energy pricing
  flow through to all classes of consumer
  Electricity Industry Reform Act 1998

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.Paradoxes of Regulation

• Multiple regulators, controls proliferating
  haphazardly
• The Electricity Commission will have
  responsibility for governance and regulation of
  the industry. Key roles for the Commission
  include
• . proper coordination across the supply chain,
  so that accountabilities and interfaces are clear
  and delivery of cost-effective solutions is
  facilitated.
• Govt Policy Statement on Electricity

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.Paradoxes of Regulation

• Big issues seem to be off the agenda e.g.
  generation
• We had 9,432 MW of generation capacity in March
  1999,
• We had 8,858 MW by March 2005
• (Energy Data File)
• Between 2000 and 2005 only 663 MW of generation
  has been built, including 150 MW of emergency
  generation at Whirinaki
• Hydro security may be feeling effects of global
  warming (3 dry years since 2001). Lots of other
  problems coal, gas, geothermal, new hydro, RMA
• Regulatory incentives to linecos are to maximise
  throughput, minimise investment
• Market incentives to gentailers are the same.

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.Paradoxes of Regulation

• Commerce Commission focus is on reducing
  investment certainty flexibility
• Increasing noise about reducing profits at 2009
  reset
• CPI-X is not the only squeeze harsh ODVs,
  low-end WACC, hoovering up information via asset
  management plans etc
• Status quo via of poles wires industry keep
  to whats in the handbook(s)
• Apparent purity in eliminating lineco
  cross-subsidies (what about petrol taxes for
  roading, local body rates, etc etc?)
• Focusing on rebates, which may mean more
  political uncertainty for trusts and companies
• Hard line on pass-through of R D costs..

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.Paradoxes of Regulation

• Eliminating consumer rebates raises industry
  efficiency?
• Some economic justification, but
• More political uncertainty for trusts and
  companies an imperfect world
• Reduced line charges usually mean higher retailer
  profits at least rebates reach consumers
• Higher retained earnings/ reinvestment a very
  uncertain path the Transpower example
• The biggest discounts/rebates seem to be around
  4 per week per consumer typically less than 1
  cup of coffee a week.

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ENA Issues

• Would just one regulator be better?
• Is there any real scope to get back into
  generation?
• Can the ODV process be made less punitive?
• Can we reduce the 2009 reset uncertainties?
• What do we do about the cross-subsidies issue?
• Is investment keeping up with prudent industry
  requirements?

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What about the National Energy Strategy?

• Its had a slow gestation (9 months just for the
  terms of reference)
• Weve seen something like it several times before
  (National Development Conference, Energy Issues
  Options
• Risk that needed changes will get caught up in
  protracted, generalised debate
• On the other hand, a new Minister .
• and some signs of awareness that the industry is
  in trouble.

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a couple of recent comments from Ministers

• Hon TREVOR MALLARD . That member voted for
  the Bradford reforms, which are the main cause of
  this problem.
• Hon DAVID PARKER I have confidence that the
  improvements that this Government has made to
  structures concerning investment decisions and
  transmission capacity have improved the
  situation. I do note that in a discussion paper
  the Government has put out, we do actually signal
  that at some time in the future we think it will
  be wise to bring some of the functions of the
  Commerce Commission into the Electricity
  Commission.

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The Regulatory Road Ahead