Graham Kennedy: Electricity Industry Bill — Second Reading 
Graham Kennedy: Electricity Industry Bill — Second Reading 
[Volume:665;Page:12481] 
Dr KENNEDY GRAHAM (Green) 
: 
 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.