Electricity Industry Bill

Hon GERRY BROWNLEE (Minister of Energy and Resources) Link to this

I move, That the Electricity Industry Bill be now read a second time. The bill aims to improve the current electricity market by putting more pressure on costs and prices, improving security of supply, and streamlining governance arrangements for the sector. The bill ensures that Government decisions made last year on the recommendations of the ministerial review, which I set up to consider how the electricity market was working, are in fact put in place.

The review was undertaken by six independent experts as well as officials and expert consultants, and took into account submissions by interested parties on a detailed discussion document. The ministerial review as set up identified that the increase in prices for residential consumers over the last decade was a matter of particular concern. Everyone knows that in the 8 years prior to 2009 electricity prices for residential consumers rose by some 73 percent, or three times the rate of inflation. The review identified insufficient competition—particularly at the retail level, and particularly in the South Island—as key reasons for an undue increase in those retail margins for residential customers.

The bill seeks to improve the level of competition through a series of measures. One important measure is to improve the balance in the portfolios of the State-owned generators, both in terms of location of their assets and activities, and the type of generation they own. The asset transfers include transferring Tekapō A and Tekapō B power stations from Meridian Energy to Genesis; transferring Whirinaki power station, currently owned by the Government for reserve purposes, to Meridian Energy; and putting in place virtual asset swaps by virtue of long-term hedge contracts between the State-owned generators.

We are already seeing the benefits of these proposed transfers, with more vigorous competition in retail markets, including the entry of Genesis into the South Island, particularly in Christchurch, Dunedin, and Queenstown. An important measure is to allow lines businesses back into retailing, subject to certain restrictions to ensure open access to lines for competing retailers and generators. Another measure set to make a difference is the establishment of a liquid hedge market to make it easier for new-entrant retailers and generators to cover their risks and to get into the market place. Other measures include setting up a fund to ensure that consumers can shop around, making more New Zealanders aware that electricity, like any other consumer good, can be purchased on the basis of the best price.

It is also a fact that the main component of the bill concerns improving security of supply. The review concluded that the current arrangements provide incentives for undue and premature reliance on public conservation campaigns, and that the reserve energy scheme put in place in 2004 was somewhat misguided, and perversely reduces security of supply. No one doubts the motives for putting it in place, but it did not work out the way it should have. At the same time the review noted that there are trade-offs between security of supply and price, and that in improving security of supply, there are implications for costs and prices. In that regard, the review exhibited the realism that was notably lacking in a previous report on this matter.

The bill seeks to improve security of supply through abolishing the reserve energy scheme, requiring retailers to compensate consumers during public conservation campaigns, and putting a floor on spot prices during such campaigns. The aim of these measures is to encourage generators and retailers to manage supply issues and to remove the free lunch option of transferring costs, or socialising those costs to consumers through public conservation campaigns.

Finally, the bill improves the governance arrangements for the electricity industry. The ministerial review concluded that the Electricity Commission had not done its fundamental job of regulating the industry as well as it could, because it had too many objectives and too many functions, and it was not sufficiently independent. The bill fixes these problems by disestablishing the Electricity Commission and replacing it with a focused and independent Electricity Authority. Functions that are more sensibly performed by other bodies—such as approvals for grid upgrades, management of supply emergencies, and promotion of energy efficiency—are transferred to other bodies that already have a role in doing exactly those things. We are effectively taking out duplication of effort. The objectives of the authority are narrowed to the things that it can and should be held accountable for—namely, providing for an efficient, competitive, reliable market—and do not include things that other bodies are already legislated to do.

The bill was referred to the Finance and Expenditure Committee, which heard submissions from a wide range of interested parties. I commend the committee for the excellent work it has done in refining this bill, and I support the committee’s recommendations. The changes recommended by the committee are designed to fine-tune the bill and to address the concerns raised by some submitters.

I take this opportunity to discuss several of the improvements made to the bill by the select committee, first with regard to the proposed transfer of assets Tekapō A and Tekapō B from Meridian Energy to Genesis. The committee made several amendments to the Supplementary Order Paper that I sent to it for consideration. The Supplementary Order Paper set out various processes to maintain current environmental outcomes and the rights and obligations of various parties following the transfer. The Supplementary Order Paper has been incorporated in the bill, with a number of changes. The most important of these changes is to extend the protection given to the named agreements in schedule 4A—ironically, it has a similar name to another matter on which I have also been very keen to listen to what New Zealanders have to say—to any written agreements with Meridian Energy relating to the Tekapō station. Another important change is to make it clear, to avoid doubt and to help address the concerns of irrigators in the Waitaki region, that nothing in this Act changes the application of the Waitaki Catchment Water Allocation Regional Plan.

Second, a set of significant amendments made by the select committee concerns the rules that are designed to head off the risk of anti-competitive behaviour by lines businesses if and when they ever get back into retailing. The amendments raised several thresholds for application of those rules, such as for when corporate separation is required and for the amount of generation directly connected to the grid that lines companies can own. These changes improve the balance between encouraging lines companies to provide competitive retail generation services and making sure we retain an open, competitive market.

A third set of significant changes by the committee relates to improving the incentives on lines businesses to offer remote consumers alternative types of energy for supply in situations where the cost of upgrading or replacing remote lines is prohibitive. Remote consumers whose properties were connected before 1993 retain the right to be supplied with electricity to the boundary of their property. The bill provides that lines companies may, however, supply alternatives to network lines after giving notice to that effect to consumers and property owners. In other words, they may consider embedded generation right on the consumer’s property. Lines companies may also enter into voluntary agreements with remote consumers on an alternative supply of energy within the property boundary. Such arrangements may be the most cost-effective supply option. The committee has removed disincentives for such deals by requiring the Commerce Commission to account for the costs of any deal for price-control purposes.

Finally, the committee has made numerous smaller improvements to the bill, ensuring that it works smoothly, that rights are protected, and that the overall objectives of the reform package are achieved. Some further, minor technical amendments have come to light since the report back, and I expect to table those amendments as a Supplementary Order Paper in the next few days.

As I have said on many occasions, I cannot promise that electricity prices will fall as a result of the reform package. There are a number of upward cost pressures in the electricity industry, most notably the need to build new power generation to meet increased demand for electricity and to ensure security of supply. We have long since run out of cheap options for new power stations. However, I can promise that this bill will increase the level of competition in the industry, especially in retailing and especially in the South Island. This will put ongoing pressure on generators and retailers to improve their performance, which will be very good for consumers. Thank you.

Hon NANAIA MAHUTA (Labour—Hauraki-Waikato) Link to this

I rise to speak to the second reading of the Electricity Industry Bill and submit Labour’s opposition to it, based on three key points: firstly, the bill fails to balance the priorities of security and supply in transmission; secondly, the bill fails to achieve affordability for the consumer through greater predictability of pricing; and, thirdly, the bill is a light response to the real opportunity of achieving the sustainable production and use of electricity.

Labour’s minority report is a good articulation of the key issues put forward by the previous Opposition spokesperson on energy, Charles Chauvel. It is difficult to gain a sense of coherence about what the Government is trying to achieve in this bill, on so many fronts. But the real question has to be the one that Kiwi families all around the country are asking. What will this Government do to get a handle on increasing power prices, and will this bill actually lower them? [Interruption] I will say it again for members. What will this Government do to get a handle on increasing power prices, and how will this bill actually address that? Pensioners are feeling the pinch. Households with young people are feeling the pinch. Families with sick whānau are feeling the pinch, and worrying about the next power bill over the winter period creates more worry and more frustration. This is a real issue facing Kiwi families right now, and these are their questions.

Labour’s minority report states that although this bill aims to improve competition in the electricity market and improve security of supply, it does very little for consumers. Feedback from officials notes that such measures tend to put upward pressure on prices. The Minister of Energy and Resources would be hard-pressed to explain just how effective asset swaps amongst the big State-owned enterprises will be in addressing this question. One can only surmise that the real ambition is to prepare some State-owned enterprises for full or partial privatisation in the next term, if National were to be re-elected. We find ourselves agreeing with the views formed that asset swaps increase the risk to electricity supply and will result in a loss of efficiency in some areas of electricity generation, and that the cost-benefit case for asset transfer is unclear, which view in part was supported by submissions from Transpower and the Institution of Professional Engineers New Zealand, and by Treasury reports.

There is a dogged ideological belief by the Minister and his Government that the market will better respond to pricing pressures. But will it fix what Kiwi households want? In several questions to the Minister, Kiwi households wanted to know how this reform would lower their monthly power bill. The answer was that consumers should shop around. He certainly does not know some of the pressures on low and modest income households that are feeling the pinch. Many consumers join payment schemes that enable a bit-by-bit approach to paying off their monthly power bills. Some households that are feeling the pinch may have arrears on their power bills. There is no way that they can shop around until they clear their debts to the current providers, so they become stuck in a situation where shopping around is not a real alternative that they can pick up on, because they simply do not have the household income to bulk pay their monthly bills or any outstanding amounts.

Worse still, even if they do opt to change retailers, it could take up to 6 weeks for a transfer to be effected. During that time some stress occurs because the household relies on a secure supply of electricity to their home. What if retailers have a communication breakdown, and power is cut off before a new account starts? This is a particular concern for some elderly folk who are dissatisfied with their current supply, but feel uneasy about going through the process of shopping around, because they are not clear about some of the things in this whole process. There is no assurance from the Minister on this front.

Some of the structural shifts effected by this bill compound the concern previously outlined. In fact, to the layperson many of the changes proffered by the bill are a hotchpotch of measures that lack coherence or a plan. Coming from that Minister, who changed the plan on the conservation estate and the mining of schedule 4 lands, it should be no surprise. Despite the Minister’s assurances, the Government has not updated the New Zealand Energy Strategy, which he promised to do earlier this year. That is of real concern. Here we have a hotchpotch of measures that do not appear to be linked in any way to a big picture or vision for energy generation, for a secure and sustainable supply, and, ultimately, for better pricing conditions for Kiwi households.

Most Kiwi households are not dogmatic about structural reform in this sector, but they have some basic needs that should be understood. I am sure other constituent MPs will be hearing the same messages that I am hearing. Households want a secure supply of electricity to their homes. Households want a more predictable and accurate pricing structure. Households are open to incentives that promote energy conservation. Households would make better decisions around energy-efficient choices if there were better cost incentives. Labour is concerned that the Government is lukewarm on these concerns of real Kiwi households, and it is lukewarm on the issue of renewable sources of energy when many Kiwi households are looking at more energy-efficient housing options to future-proof their existing homes.

More important, the goal of achieving 90 percent renewable energy should be more than, as the Minister has said, aspirational. It should be a goal that is actively worked on with some vigour by the Government. Māori are proactively venturing into the space of renewable sources of energy generation and electricity supply, and are having greater regard for the health of the environment. It is all synonymous with the Māori world view. All new energy generation to meet the needs of a growing population should come from renewable sources. That signal alone will create new and different jobs, and in some cases it will also build on, and invest in, our clean, green image, which we all boast about when we are overseas.

Just briefly, I want to comment on the removal of the Electricity Commission in favour of an Electricity Authority. One role the commission had was to provide coordination within the sector and to have oversight to ensure fairness and sustainability in the supply of electricity. The new authority will have no such oversight, and this too is of real concern. Consumers who could previously take their concerns regarding fairness to the commission have nowhere to go, or they have to go directly to the Minister.

During the adjournment I received a complaint from a woman living in Nelson about the increase in her power prices from Contact Energy. She said that Contact Energy has raised its prices four times—

CRAIG FOSS (National—Tukituki) Link to this

In the normal course of events, during the second reading of a bill we talk to some of the amendments the select committee has made to the bill that was originally introduced to the House. This is the first opportunity that members, and particularly members of the Finance and Expenditure Committee, have to comment on the changes that have come from the select committee process. The process for the Electricity Industry Bill was very robust, and I think it shows the select committee in action. I say, in respect of the previous speaker, that Labour has put in a minority report, but overall, as we went through the process, I think some good changes, which the Minister acknowledged, were put through. I acknowledge the hard work of my Finance and Expenditure Committee and the officials who got us to this place, including some members on the Opposition benches who were subbed on and off because it was their particular area.

We called for submissions on 15 December and they were open for a long time, until 26 February 2010, just after Parliament resumed. But interestingly, as we went through the bill, some issues arose from the submissions. We received a letter from the Minister that pointed us to a Supplementary Order Paper that made some changes to the original bill, which he intended to bring to our committee. The committee decided to reopen for submissions particularly, but only on this Supplementary Order Paper, as intended.

Once again it is all credit to the process because from the submissions on the original Supplementary Order Paper that was before us, further changes were recommended by the Finance and Expenditure Committee. I am sure members who are from down south will be talking about the various issues in relation to Waitaki, which I will speak about during another reading of this bill. It was very interesting and I have learnt a lot about that part of the world. I acknowledge the changes that have been alluded to in the commentary and throughout the bill.

I want to make a couple of points in particular. I note that this bill balances essential priorities in the energy sector. This bill adds equity and environmental protection, and imposes coherent policy solutions to a very troubled sector. We saw increases of 72 percent in the cost of power when members opposite were in power. This bill implements proposals that have been properly evaluated. Goodness me, the previous Government had 9 or 10 years to evaluate various solutions to the problems it now seems to acknowledge, but it is now suddenly saying that it will vote against this bill, which tries to fix some of those problems. I do not know what is up there.

It is quite correct that this bill will not control price increases. It is not intended to do so. This is not the socialist nirvana that perhaps some members opposite might want. But what this bill will do is provide the opportunity to, at the very least, start to slow down the crazy increases we have seen in the price of retail power and business power over the last 5 years or so. In the last 6 or 7 years the increase has been 72 percent, which is absolutely outrageous. A previous speaker had the audacity to talk about pensioners being pinched, without even acknowledging or apologising for—which would have been more polite—the fact that those same consumers were faced with increases of 72 percent during Labour’s term in Government. I point out that those superannuitants are now better off. A married couple on superannuation are better off by $78 per week as a result of the tax changes and indexation of superannuation that this Government has brought forward to help those people cope with some of the increases they face, such as electricity price increases. We all acknowledge that some consumers face a difficult time in meeting some of these obligations, and this bill is about trying to address some of the structural problems that have led to this sector becoming out of control.

I have yet to hear—but perhaps we will hear it from other speakers—apologies from members opposite for the brownouts, and the threat of blackouts, that we had during their term in office. Every winter there were publicity schemes to tell us to turn off our power because of the total mismanagement and structural inadequacies that the previous Government did not address in relation to electricity. I look forward to discussing this bill and these amendments further as we move it through the House.

CHRIS HIPKINS (Labour—Rimutaka) Link to this

If anybody should be apologising to the New Zealand public for the perilous state of our electricity system, it is Max Bradford and his ministerial colleagues who created the mess in the first place. Although I accept that the previous Labour Government did not adequately solve the problem Max Bradford created, it does not mean that the Labour Government was responsible for creating the mess in the first place. It is very hard to unscramble an egg, which is exactly what Max Bradford did. He created a huge shambles, and we are still living with the impact of that today.

People who are worried about their increasing power bills will be very disappointed to hear Craig Foss stand up in this House and all but say he does not care. The Government does not care about increasing power prices. It accepts that this bill will not do anything to stop the massive increases in power prices that New Zealanders are seeing. Many submitters to the Finance and Expenditure Committee said that this bill will increase power prices, not lower them. The select committee received some very considered submissions, but the Government chose to ignore them.

The Labour Party is opposed to this bill because we believe it fails to balance the priorities of a secure electricity supply, affordable and predictable pricing, and the sustainable production and use of electricity. Those are the three major points that we think the electricity system should be based upon, and this bill does not do that. In fact, we are very concerned that some of the proposals put forward by the National Government have not been subject to the type of rigorous analysis we should be able to expect from legislation that has a multimillion-dollar impact, and that is the sort of impact this bill will have because it asset swaps.

We are not talking about toys here. We are not talking about minor things being switched around, such as saying: “Meridian have been allowed to play with the Waitaki for a little while so now we’ll give it to Genesis and let them have a play with it.” We are talking about multimillion-dollar assets, and the least that the New Zealand public can expect from their Government, which is the trustee of these assets on their behalf, is that significant changes are adequately and robustly analysed to make sure they will work. We have seen very little analysis of that by this Government.

Treasury’s regulatory impact analysis team argued that many of these proposals have not been properly thought-out. Treasury said that the regulatory impact assessment for the bill was lacking in certain areas and should have—and I quote directly from Treasury, in the commentary on the bill—“included a more comprehensive discussion of the risks associated with proposed options”. We are talking about significant risks. I restate the point that we are talking about a multimillion-dollar asset reorganisation. Treasury has argued that the risks have not been properly analysed.

Treasury also argued that the regulatory assessment for the bill should: “provide a better idea of the magnitude of costs and benefits of the options discussed in comparison to the problem they are trying to address”. These are pretty basic, fundamental issues that the Government has not dealt with in putting these proposals before the House. Treasury argued that the assessment should have: “better reflected the range of views received during consultation”. The Government’s approach to the select committee process was to ignore the vast bulk of evidence put before the committee. Treasury also argued that the assessment should have contained: “a discussion of whether or not the options proposed have been tried overseas, and, if so, what their impact was”.

Electricity reform has been tried all around the world. We have one of the worst records for power price increases in the last few decades, so why would we not look around the world to see what is being done? I am very concerned about the proposed asset swap. The select committee received some very considered submissions from organisations such as the Institution of Professional Engineers, which argued that the Waitaki water system operates best as a coherent whole and that removing Tekapō A and Tekapō B—which is what this bill does—from Meridian and handing them over to Genesis is potentially creating a less-efficient use of the water. It argued that we are creating competition on that water system whereby the players will be incentivised to maximise their own commercial benefit from the use of the water rather than make the best overall use of the water on the Waitaki system. That view, which was put forward by the Institution of Professional Engineers in a very considered submission, was ignored by the Government.

We are very concerned about the impact that this bill will have. TrustPower stated in its submission: “the uncertainty created by the industry shake-up [is] likely to have a chilling effect on private electricity generators’ willingness to invest in new electricity plant, raising the prospect of shortages again within a decade.” TrustPower, which is one of the bigger players in our electricity sector, says that this will have a chilling effect on investment in new electricity plant, raising the prospect of shortages within a decade.

The electricity sector has long lead times. What we were suffering from a few years ago, with the electricity shortages, was a lack of foresight when those first electricity reforms were put forward in the late 1990s. It created this market and disincentivised investment in new generation. We suffered the consequences of that throughout the late 2000s, before we reached 2010. The Government has not done anything to deal with that.

Gerry Brownlee stands in the House and trumpets the fact that we have done very well in the last year or two in terms of the renewable electricity we have had. There are two reasons for that, the first of which is that it has rained quite a lot. Gerry Brownlee may like to claim credit for a lot of things, but I do not think he can claim credit for the fact that it has rained quite a lot in the South Island in the last couple of years. That has been a significant contributor to the proportion of renewable electricity generation that we have seen in New Zealand over the last couple of years.

The other reason is the significant emphasis that the previous Labour Government put on encouraging investment in renewable plant. Things like wind farms, which have been coming on stream and have increased our renewable energy percentage, are very good things. Unfortunately, this bill does nothing to further those reforms or to further the drive towards renewable energy. Of course, that is not really surprising, because this Government’s overall Energy Strategy is a total shambles.

On the one hand, Gerry Brownlee is saying that the Government is committed to having 90 percent renewable electricity, but, on the other hand, he is going up and down the country talking about “sexy coal”. I am not sure how he manages to reconcile those two things, but that just goes to show what a total shambles the Government’s energy policies are.

I have to say that the Leader of the House and the Minister of Energy and Resources obviously do not get on very well together. What kind of Leader of the House would put forward an energy bill for debate in Parliament today? On the day that the Government backed down on the mining, he put forward an energy bill for debate in Parliament. The Minister of Energy and Resources and the Leader of the House may want to communicate a little bit more!

I would have thought that the Government would be conscious about not wanting to debate a whole lot of energy issues in the House today, given the absolute dog’s breakfast it has made out of the mining issue and the absolutely humiliating back-down that John Key had to make today after going out there and promising that the energy sector would be the major cornerstone of the Government’s step change in the economy. Yet we have here today the Electricity Industry Bill, which will not lower power prices or lead to a more sustainable supply of electricity. On the same day, the Government is also backing down on its plans to mine in the national parks. It just goes to show what happens when the Government blunders its way through putting forward proposals on the energy sector without making sure that it has the evidence, the facts, and the research all lined up beforehand.

The Government’s energy policies are a mess. Gerry Brownlee promised a New Zealand Energy Strategy within months of becoming the Minister of Energy and Resources. The Government is more than halfway through its term and we are still waiting for a New Zealand Energy Strategy. The importance of a New Zealand Energy Strategy cannot be understated. People and companies look to it for the important signals it sends about where they should be investing, what the Government’s overall vision is, where the incentives lie, and where the penalties lie. There has been nothing from the Government on that.

The current Energy Strategy is the Energy Strategy put in place by the previous Labour Government, and Gerry Brownlee is going around the country telling everybody to ignore it because this Government does not support it. The Government’s official Energy Strategy is, in fact, the Energy Strategy of the previous Labour Government, because Gerry Brownlee has not got around to putting in place another one. It is a year and a half since National became the Government, and it is about time it finally stumped up and put forward a coherent plan and a coherent vision for the energy sector in New Zealand.

Labour members will have a lot to say about the Electricity Industry Bill as it progresses through its remaining stages in this House. We think it is very weak. The bill has a lot of flaws that will need to be addressed in the Committee of the whole House, and we will have some further things to share with the House on that as we go through that debate. This is not a bill that will lower power prices for ordinary, everyday working New Zealanders. The Government has given up on the task of trying to contain power price increases. Power prices will keep going up under National.

Dr KENNEDY GRAHAM (Green) Link to this

This Electricity Industry Bill is not the first and almost certainly will not be the last legislation that seeks to tinker with the New Zealand electricity sector. The generation and transmission, distribution, and retailing of electricity has become one of the jabberwockies of the New Zealand economy. The policy developments over the last 20 years reflect deeply held, if dimly perceived, points of economic ideology. Their structural implications have made for the labyrinthine institutional relationships between entities that pretend to compete and cooperate at one and the same time, as the market signals conveyed by the sedimentary layers of legislation remain unclear over whether they are to compete or cooperate with one another, and their retail pricing has become a political perennial in this country, ranking as one of the most sensitive electoral issues each time round.

It follows that the scope for political point-scoring between the two major parties is at its highest. We have heard in the first reading, and now already in this second reading debate, how National holds Labour and how Labour holds National to account for the 72 percent retail price hike in a decade, which is threefold greater than the CPI inflation rate. For many decades until the 1980s, the New Zealand electricity industry ploughed a reasonably contented field of security of supply and relative price stability, rationally planned transmission, and future-oriented generation capacity. This was based on the same power sources that we tend to rely on today: hydro, geothermal, and natural gas. It was Government-owned and operated, and hence lacked the sharp-edged prod of private competition. But it had the associated freedom to regard the supply of power to industry firms and households as a public good. That is a freedom too often dismissed or denied.

In the 1980s, gripped by an excessive dose of ideological fervour, the Labour Government commenced the move to dismantle the public sector’s control of the power industry and shifted towards a mixed, public-private competitive model. Not to be outdone, the National Government of the 1990s furthered this trend, pitting public-owned State-owned enterprises against public tradable companies. The resulting mix has become something of a dog’s breakfast over the ensuing years. The 2009 ministerial review was fairly accurate in its critique, particularly on the two major problems encountered: high retail prices and insufficient retail competition across regions, and inadequate security of supply, especially during dry years.

Adding to these sectoral shortcomings is an institutional criticism that the governance arrangement is unsatisfactory, with the current Electricity Commission having too many objectives and functions to its name and not being sufficiently independent of the Government. The current planning process does nothing to assist in clarity of purpose or operation. Most people assume that there is a planning process, identifying the nature of electricity demand, assessing operations available through a cost-benefit analysis, and followed by a genuine Resource Management Act process.

In fact, nothing like this occurs at all. There is no public interest planning process to speak of. Rather, individual power companies identify generation schemes to maximise profit margins, and put these schemes into the Resource Management Act process with no comparable alternative offered. It is possible that an outcome reflecting the public good might emerge, but only by accident rather than by design. The system is heavily biased to a think big style of generation, rather than conservation and small-scale generation. So today, after 20 years of so-called reform, we probably have an electricity industry that operates more poorly than it did when it was under governmental operation. The continual need to attempt a reform of the original changes in the 1980s, continuous through the past two decades, and their continual failure to get to the heart of the problem provide testimony to this.

Today, after 20 years, we have a strange economic system for the generation and delivery of power. We have essentially five generators, three of which are public State-owned enterprises, and two of which are publicly tradable companies. This in itself guarantees to distort the smooth operation of the upstream stage of the sector. We have one entity for transmission exerting a pure monopoly at that commercial level. We have 28 lines companies to distribute the electricity to the retailers. These are owned by trusts or by public companies, except that some major industrial users—for example, in the dairy or in the steel and aluminium businesses—are directly connected to the grid. We then have 12 retailers, five of which are the generators themselves or are generator-owned. Seven others are private or local body - owned, but all are smaller in size than the five famously named “gen-tailers”, or generators/retailers. Floating on top of this structural nightmare, we have pricing nodes at over 200 grid exit points, where retail pricing is determined every half hour over a 24-hour period and where deals are struck between the generators and the retailers, which are largely the same commercial entities.

This vertical integration from generation to retailing allows the generators/retailers to operate as a natural hedge against any risk of volatility in the spot market. It also ensures that their margins are high, no matter what the economic and social stress imposed on the most vulnerable of the end consumer—the householder—is. This bizarre commercial mosaic is the child of two estranged progenitors: ideological rivalry between the two major parties and historical mischance within the bureaucracy. New Zealand’s feeble attempts to tame and train the commercial industrial beast we have created have proved to be just that—feeble.

How do we rectify matters? Through forcing the invisible hand, of course! We shall make pricing fairer and more predictable, and we shall increase security of supply. But how do we achieve those two over-arcing goals? By decree. By telling the invisible hand what to do. Listening to the pure sounds of perfect competition, the Government will intervene in the market and restructure it. It will step in and redistribute assets. It will take some hydro generating capacity away from one State-owned enterprise and hand it over to another, thereby economically fragmenting a single natural ecological system. The stated purpose of this legerdemain is to increase competition across regions, essentially between the North Island and South Island. It will further stimulate competition not just through physical asset swaps but through virtual asset swaps between the three State-owned enterprises. It involves a 15-year contract designed to preserve the ability of each to provide increased competition in the island where they currently have little or no generating capacity.

But wait, there is more. There will be a fund of $15 million over 3 years to promote customers switching between retailers. “Do not complain about price increases in power,” admonishes our Prime Minister, “just shop around. Let the imperfect market speak, and if it doesn’t, shut up and don’t bother me.” All major generators will be required to put in place an accessible electricity hedge market, which is yet another example of the free market singing its own praises.

There is absolutely no guarantee that any of this will achieve the two stated goals of price stability and security of supply. Indeed, these changes may result in so much more stage-managed confusion to the free market as to produce the opposite effect. I recall the debate in the first reading, and I have sat through the select committee hearings and deliberations. I remain unpersuaded that the Government knows with confidence what it is doing with this legislation. It is the product of many bureaucratic minds working at cross purposes. Exposed by a negative impact analysis, being hatched under the distant gaze of an unfocused Minister, it guarantees, in short, further poor performance and further reform efforts in the future.

At a more underlying level of concern, the bill simply misses the point. In the early 21st century, what the country needs is not ideological tinkering to restructure a flawed system that is malfunctioning; what is needed is a fundamental reappraisal of the need for greater conservation of use, efficiency of generation, and alternative renewable supply. We need to be targeting increases in solar energy, wind energy, and tidal energy. We need to focus on what market price signal through a proper carbon price mechanism is required so that these new sources of power can be enabled to flourish rather than be stifled by more of the same and silly asset swaps. Until that happens, we shall be waiting for Godot, whether it comes in the form of Minister Richardson, or Minister Bradford, or Minister Brownlee. For those reasons, the Green Party will not be supporting this bill.

JOHN BOSCAWEN (ACT) Link to this

The ACT Party will be supporting the Electricity Industry Bill at its second reading. I am proud to say that I was a member of the Finance and Expenditure Committee that considered the submissions on this bill and deliberated on the Supplementary Order Paper put up by the Minister of Energy and Resources.

As the Minister explained, the fundamental objective of this bill is to create greater retail competition, particularly in the South Island. There are three or four key things that this bill provides. Firstly, it provides for the transfer of the ownership of the Tekapō A and Tekapō B power stations on the Waitaki River from Meridian Energy to Genesis Power. Secondly, it provides for a swap market—or a virtual asset swap, if you like—to provide forward electricity contracts for a further 15 years, or 15 years from the bill coming into effect. Thirdly, the bill makes it easier for lines companies to compete at the retail level.

I would like to step back and try to briefly explain to the House the structure of New Zealand’s electricity market. It was not something that I understood well before I came to Parliament, and as I have travelled around the country speaking on the issue of electricity prices it has been very obvious to me that New Zealanders also do not understand how the electricity market works. I guess in a way I will repeat part of what Kennedy Graham has just said. New Zealand has five major electricity generators, and they are all different. Of those five, three are owned by the State, or the taxpayer, as they are State-owned enterprises, and two are privately owned. The three State-owned enterprises are Mighty River Power, Genesis Energy, and Meridian Energy.

The make-up of those companies is fundamental to this bill, which is why I think it is important to understand what those companies are and where they operate. Mighty River Power is a company that is based substantially in the North Island. It generates electricity from power stations and hydro stations on the Waikato River, and geothermal stations around Taupō. So we can look on Mighty River Power as being a North Island power company, with 90 percent of its production being renewable. Only 10 percent is generated from gas, which comes from the Southdown generation plant in Auckland.

Let us compare that with Genesis. It is a company that substantially has as its major asset the Huntly power station, which generates electricity from the burning of coal and gas. Seventy-five percent of what Genesis produces comes from the Huntly power station, and up until quite recently most of what Genesis sold was sold in the North Island. Genesis was a North Island retailer, just like Mighty River Power was, but in recent times it has moved into the South Island. The Minister referred to increasing competition by Genesis as a result of its move into Christchurch, Dunedin, and Queenstown, and that competition has come ahead of this bill. Genesis has anticipated that this Parliament will pass this bill.

The third power company is Meridian Energy, which is 100 percent renewable. It generates electricity from the hydro stations in South Island rivers, the Waitaki River in particular, and it generates some renewable energy from wind stations in Wellington at the West Wind station at Mākara, and also up in the Manawatū. So there we have three Government-owned power stations. Mighty River Power is 90 percent renewable in the North Island, Meridian is 100 percent renewable in the South Island, and Genesis is essentially a non-renewable company.

We can add to that list TrustPower and Contact Energy. Contact Energy, which came out of the old New Zealand Electricity Commission, was privatised and sold off by the Government. So there are two privately owned generators and three Government-owned generators. This bill is transferring the ownership of two power stations on the Waitaki River, currently owned by Meridian, to Genesis. That will give Genesis, the company that operates predominantly in the North Island, two power stations on the Waitaki River. The bill will give Genesis generating capacity in the South Island, and this will make it much easier for Genesis to retail electricity in the South Island.

In the expectation that Parliament would pass this bill, as I said, Genesis has gone into Christchurch, Dunedin, and Queenstown, and has aggressively sought customers. It has underpriced the market, and gone in there and competitively bid for customers by offering cheaper prices. Contact Energy is a major supplier of electricity in Christchurch and Dunedin, and it has seen its market share undercut by Genesis coming in and anticipating this bill being passed.

I do not think New Zealanders fully appreciate the fact—and Mr Kennedy Graham referred to this—that the wholesale price of electricity is set every half hour. So 48 times a day the generators conduct a computer auction against themselves and against other retailers, and those generators offer electricity to the market. So 48 times a day a generator says that it is prepared to supply a certain amount of electricity at a certain price, that for a higher price it will produce more, and that at an even higher price it will produce even more. It is the balance between the retailers demanding the electricity and the generators offering to supply it that sets the market price. Once that market price is set, that is the price that all the generators receive. So Meridian Energy may, for example, offer to supply electricity at 6c or 7c a unit per kilowatt hour, and Genesis could be generating electricity from imported coal from Indonesia. If the price that Genesis offers electricity to the market is 10c a unit, and that electricity is demanded by the market, 10c is the price that all generators get.

I found it very interesting that Labour members in particular have focused on electricity prices.

AMY ADAMS (National—Selwyn) Link to this

I am happy to take a call this evening on the Electricity Industry Bill, having been part of the Finance and Expenditure Committee that had the pleasure of working through the process in respect of this legislation.

The electricity sector is a key part of our country, not only of our economy but also of our household sector. I think it is worth recapping that the reforms in the bill arose from a ministerial review into the performance of this sector. That review came about because there was widespread concern amongst New Zealanders about prices, security of supply, and issues with the governance of the sector. It is also worth noting that the ministerial review was aided by an exceptional technical advisory group. The work that that review panel did laid the foundations for the bill we have before us.

The key findings were that there were price rises, particularly in some sectors, well outside what could be justified. In particular, the margins in the residential power price sector were much higher than could be reasonably expected. The review looked at the question of the adequacy of the new generation capacity. It found that New Zealand had a particular vulnerability to dry years, and consumers were being repeatedly asked to go through public conservation programmes to make up for the failure of the electricity sector to adequately manage that vulnerability. The other key finding was that the Electricity Commission was trying to juggle too many balls and it was not sufficiently focusing on the key aspects of its role.

With that in mind, I say that the Electricity Industry Bill has come before us. I think the select committee process was valuable, and the committee came up with some important improvements to the bill. One improvement I want to touch on relates to the work we did to make sure that the mechanics of the assets swap, in terms of the transfer of Tekapō A and Tekapō B from Meridian Energy to Genesis Power, would work properly and ensure in particular that third-party users of the Waitaki River system would not be detrimentally affected. There was considerable concern about ensuring that moving from dealing with just Meridian to dealing with Meridian and Genesis would leave the Waitaki irrigators in no worse a position. We understand and accept that they have issues remaining to deal with, but they were outside the ambit of this bill. Our concern was to ensure that nothing to do with the asset transfers would put any party in a more difficult position in terms of resolving those matters. I think we have come to a good place there.

We also did a lot of work around some of the technical aspects of governance, including looking at some of the issues like the necessity for by-elections upon the retirements of trustees of consumer trusts and the like, in order to ensure that we have a good balance between consumer protection and unnecessary cost.

One of the other key changes that the committee recommended is increasing the threshold before lines companies are required to undertake corporate separation between their lines company business and the generating/retailing aspects of their business. The bill always had a threshold for that. There was considerable concern from submitters that that threshold was so low that it would defeat the objective of getting lines companies back into the game. We took that on board and we recommended that the threshold be increased. Certainly, it is good to see the Minister take that on board.

In closing my brief contribution tonight, I want to mention some of the comments we have seen in the mainstream media on the reforms. The Press editorial from my own part of the world commented: “Changes made by Labour did little to improve the sector, and, if anything, worsened it.”—and I think we can all agree with that. It continues: “The signs are that the package may well deliver more competition and the prices will be more stable. These reforms should be effective in better meeting the aims of an efficient market.” Interestingly enough, we have Jeanette Fitzsimons blogging: “The Government’s moves to make the power retail market more competitive are good,”. That is strong praise indeed from Ms Fitzsimons. Consumer New Zealand’s chief executive said: “I think the asset swap—both the physical one and the virtual swap—will mean they will no longer be just competing in the regional area they are generating in, but will have to go nationwide.”

I think we will see from the reforms in this package a better-organised sector, a better-governed sector, more competition, and, at the end of the day, a better outcome for the users of electricity, which is what this is all about. I am pleased to commend this bill to the House. Thank you.

CHARLES CHAUVEL (Labour) Link to this

What is needed now in the New Zealand electricity sector is security of supply and transmission of electricity, affordability, predictability of pricing, and sustainability as far as production and use are concerned. The Electricity Industry Bill fails to deliver any of those priorities.

The bill fails even to meet the Government’s own stated goals and objectives for the sector. It is all very well to seek to improve competition—which is what the commentary on the bill says it will try to do—to seek to constrain price increases, to seek to increase security of supply, and to seek to ensure effective and streamlined governance of the sector; those are the three stated aims of the bill. But, in the end, what we need to do in this House is judge legislation by its likely effect based on the evidence we hear rather than on pious intention. The House needs to hear from members who served on the Finance and Expenditure Committee that the evidence before the committee was damning as far as the likelihood of this bill’s ability to achieve its aims was concerned.

New Zealanders are struggling to keep up with the rapidly increasing costs of living. It has been interesting to hear the speeches in the House tonight about how high electricity prices have been. After nearly 2 years of this Government in office those prices have continued to rise and rise.

DAVID BENNETT (National—Hamilton East) Link to this

I will take just a short call on the Electricity Industry Bill, basically to refute the load of rubbish we have just heard from the previous speaker, Charles Chauvel, about the glory of the previous Labour Government in keeping electricity prices down. Under Labour, the price of electricity for consumer groups rose by 72 percent.

BRENDON BURNS (Labour—Christchurch Central) Link to this

Is that it? Is that the defence of the Electricity Industry Bill? David Bennett said competition will sort out the electricity industry. Well, Mr Bennett should remember back to Max Bradford. He was going to sort out all the issues in the electricity industry with his restructuring legislation, but it did not do a darn thing to sort them out. The Minister of Finance, who has joined the House, will remember that well, and also the electoral consequences that flowed from “Mad Max’s” electricity reforms. Gerry Brownlee has learnt very little in respect of these issues. Sure, he thundered a great deal while he was in Opposition about how electricity prices were too high, and he was right about that. But this bill does absolutely nothing to address the pricing issues, and, in fact, he told the House that this afternoon. He said he cannot promise that electricity prices will reduce as a result of this legislation, and he is bang on the money in respect of that—absolutely right.

An interesting thing emerged during the consideration of the bill by the Finance and Expenditure Committee. We had the chief executive of Meridian Energy in front of us, and I asked Tim Lusk a question about whether Meridian Energy supported the asset swap that takes the Tekapō A and Tekapō B power stations from Meridian Energy’s ownership and puts them into the ownership of its rival State-owned enterprise, Genesis. Mr Lusk—with not the most convincing body language, I have to say—said yes, Meridian Energy did support this to a man and woman within the company. I thought that was interesting, so I asked the Minister of Energy and Resources whether he had received any advice from Meridian Energy against the power swap. He told me that no, he had not had any advice against the power swap.

So I put in an Official Information Act request to the Minister for State Owned Enterprises, Simon Power, and back came a letter sent from the chair of Meridian Energy, Wayne Boyd, on 21 December 2009 to Mr Power, to Bill English as the Minister of Finance, and to Steven Joyce as the Associate Minister of Finance. It said this: “When we begin to consider the steps that must be taken to implement the changes, a number of issues arise. It is a matter of particular concern that Meridian had no opportunity to comment on the final asset transfer decision, losing Tekapō A and B with no offsetting new generation capacity. We had no opportunity to provide wider analysis of the wider market implications of the current decisions relating specifically to SOEs.” The letter goes on in some pages of detail, saying the asset sale significantly worsens Meridian Energy’s dry-year revenue risk and compromises Meridian Energy’s ability to cover prudent financial earnings multiples. It states that Meridian Energy was not sure about the implications of the asset swap on its relationship with Rio Tinto, the current owners of the Comalco aluminium smelter, which takes 40 percent of Meridian Energy’s current generation. It said it would not be a simple process to negotiate a new contract, based upon the changes with Tekapō A and Tekapō B. The letter goes on further to say that splitting the management of the Waitaki chain across two operators will result in a loss of efficiency in managing the water resource, and from an efficiency perspective Meridian Energy will need to hold its lakes higher in order to counter the securities of supply risks that it had outlined. It said this will result in a much higher likelihood of spill and a loss of efficiency.

This is the advice to three senior Ministers that somehow did not reach the Minister of Energy and Resources. It is an extraordinary thing that three Ministers were advised by Meridian Energy that the asset swap provided for in this bill will have dire consequences for Meridian Energy, for the security of supply and for the financial status of Meridian Energy, yet somehow or other I was told by the Minister of Energy and Resources that he had had no advice from Meridian Energy against the swap. That is an extraordinary state of affairs.

Perhaps Gerry Brownlee also chose to ignore the advice from Treasury. It also submitted on the issue of the asset swaps, saying how sceptical it was about the net benefits of the asset swap proposals in the discussion document, and noting that the technical advisory group had underestimated the costs and risks of the asset swap proposals. The officials did not recommend an asset swap. The Minister decided that they should pursue an asset swap involving Tekapō A and B, rather than just the virtual asset swap that the technical advisory group had recommended.

So we have a Minister of Energy and Resources who either does not receive or chooses to ignore the fact that the State-owned enterprise that he is responsible for has given him very strong advice about the dire consequences of this asset swap. He has Treasury telling him about the consequences of the asset swap being negative, but he proceeds with his own decision to make the asset swap the cornerstone of this electricity industry restructuring bill. It is a very high bill, based upon that. Not only did Treasury and Meridian Energy question the value of the asset swaps as proposed under this bill but so too did other experienced operators in the electricity industry, such as Doug Heffernan from Mighty River Power I thought that was an extraordinary thing. It was brave for a man who is still in the employment, effectively, of the Government as a State-owned enterprise chief executive to tell the Finance and Expenditure Committee quite candidly about his belief that asset swaps did not deliver the value that some people might ascribe to them.

CHRIS AUCHINVOLE (National—West Coast - Tasman) Link to this

It is my pleasure to speak on the Electricity Industry Bill. As my respected colleague and energy mentor the Hon Gerry Brownlee so eloquently and succinctly put it during the first reading of this bill, its purpose is to improve competition in the electricity industry, to constrain price increases, to improve the security of supply and the management of dry years, and to improve governance arrangements in the sector.

This bill addresses some of the major failings of the previous Government. It is significant that I can look across the House and see the Hon David Parker, who provided covering defensive fire against the Nats’ attacks when we were on the Opposition side of the House. He did so reasonably convincingly, I guess in retrospect, but he must have known about the tragedy, the travesty, of what he was doing. The previous Government let price increases get totally out of control, and it put the security of supply at risk. The potential consequences for our poorest, most vulnerable citizens were devastating. Nevertheless, Labour allowed that to happen. Thankfully, National has been able to step in to save the day by implementing this bill to address our previously poorly governed and poorly regulated electricity industry.

This bill enables the most effective concept that we call increased competition to be implemented. That will lead to constrained price increases. This bill will ensure that the market operates in the most efficient and competitive way possible. That is what this bill will achieve. It also abolishes the Electricity Commission. This is necessary because the Electricity Commission is a perfect example of an unnecessary, convoluted bureaucracy. I do not mean to be critical of the best efforts of the people who were involved in it—they did try to do their best—but it had too many objectives, and it had too many functions. It tried to be all things at all times, and did not operate effectively.

When I was glancing through some of the first reading debate speeches, I was not surprised to see that Chris Hipkins had accused National of having blind faith in the market. That is typical of a Labour Party member—heavy on ideology, short on economic knowledge and industry experience, and perhaps short on personal commercial experience. Perhaps he or one of his colleagues would like to explain why electricity prices went up—

Hon DAVID PARKER (Labour) Link to this

In this debate much has been made of the fact that electricity prices increased by, including inflation, 72 percent over the past decade or so. The National Government has tried to make that out as being the fault of the previous Labour Government.