Electricity and Gas Industries Bill — Second Reading 
Electricity and Gas Industries Bill — Second Reading 
[Volume:619;Page:14708] 
Electricity and Gas Industries Bill 
Second Reading 
Hon HARRY DUYNHOVEN (Associate Minister of Energy) 
 on behalf of the 
 Minister of Energy 
: I move  
That the Electricity and Gas Industries Bill be now read a second time 
. This bill is a further milestone in providing New Zealand with energy in an efficient a fair a reliable and an environmentally sustainable manner in the post-Maui environment. The bill contains measures to promote security of supply consumer protection and competition and to improve the governance of the electricity and gas industries. It updates the Electricity Act of 1992 to take account of the establishment of the Electricity Commission. The security of the supply of electricity is clearly essential to New Zealand and to New Zealanders. The bill provides an enhanced tool-box of powers for ensuring the security of the electricity supply including enabling the Electricity Commission to contract for reserve energy supplies for very dry years. Additional regulation-making powers are provided for use if required covering consumer protection the promotion of retail competition improved information for market participants and the development of distributed generation. Regulation-making powers are also provided under an amendment to the Crown Minerals Act to allow better disclosure of information relating to gas and oil reserves. The bill also amends the Commerce Act to clarify the interface between the functions and powers of the Commerce Commission and of the Electricity Commission in relation to the control of electricity distribution companies. 
The bill was referred to the Commerce 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. I take this opportunity to discuss a number of improvements made to the bill by the committee. In relation to the gas sector the bill now provides for the establishment of an approved industry body to co-regulate the gas industry while retaining backstop powers to establish an Energy Commission if the industry’s body is not successful. A co-regulatory approach was proposed by the Gas Industry Steering Group made up of representatives from the upstream and downstream gas industry and gas consumers. It has been designed in consultation with and with the support of the industry. The co-regulatory model has been developed to ensure that the incentives on the industry are aligned with the outcomes the Government seeks and that the governance arrangements are constitutionally sound. 
The bill also amends the Electricity Industry Reform Act in order to allow electricity lines companies to own any type of generation equivalent to the higher of 50 megawatts or 20 percent of the network load. The companies are of course already able to own unlimited amounts of new renewable generation. The electricity lines companies asked that the provisions in that Act that restrict the ability of lines companies to invest in generation and retailing be repealed. While the lines companies made some valid points the Government believes that risks may still exist with regard to allowing lines companies back into generation and retailing. A major change of that nature to the current industry structure would not be appropriate without full consideration and consultation on the issues involved. For that reason instead of repealing the provisions outright Government members decided that a further easing of the limits on how much electricity the lines companies can generate is more appropriate. 
A number of important provisions are also included in the bill to ensure good governance and process. The Electricity Commission will be required to assess alternatives costs and benefits prior to making recommendations for regulations or rules. That will increase transparency around the Electricity Commission’s decision-making and will reduce uncertainty for the industry. The Government also expects the commission to achieve its objectives primarily through information provision and contracting and to use the regulation-making powers provided in the bill as a last resort. It is also proposed thatthe current powers of the Minister under the Electricity Act be curtailed in a number of ways including removing the Minister’s power to direct the commission limiting the Minister’s ability to amend the commission’s recommendations and precluding the Minister from promulgating regulations unless the commission has first made a regulation. 
The select committee has also amended the bill in such a way that the power to transfer jurisdiction for the targeted price control regime for lines companies from the Commerce Commission to the Electricity Commission has been delayed until 31 March 2009. That change acknowledges the view of many submitters to the select committee who validly suggested that any change in the regulatory jurisdiction for large electricity lines companies other than Transpower should be further deferred so as to maintain the continuity and integrity of the price control and other assessment processes already initiated by the Commerce Commission. A further important improvement made by the select committee is to strengthen the mandate of the Electricity Commission to promote electricity efficiency by allowing the commission to fund programmes relating to cost-effective energy efficiency and conservation. That is important in order to allow more effective promotion of energy efficiency and demand side management. The committee has also made explicit provision for Transpower to contract for generation and to manage grid reliability. That is important for situations where it may be more cost effective to generate electricity closer to the demand for it than to upgrade the transmission lines. 
The electricity and gas sectors are critical to New Zealand’s economic growth. We face continuing challenges to ensuring the security of supply in both sectors at the best possible prices. Those challenges include the depletion of the Maui gasfield our vulnerability to dry hydro years and the growth in demand for electricity. At the same time we aim to make continuing progress towards a sustainable energy future. This bill is a key part of the Government’s response to those challenges. The Government will clearly set out its objectives for the electricity industry in the Government policy statement that will be released following the passing of this bill. The Government policy statement will continue to invite the industry to use cooperative means to deliver on those results so that the Electricity Commission will need to use its regulation-making powers only as a last resort. 
BRIAN CONNELL (National—Rakaia) 
: 
 National strongly opposes this legislation. There is no doubt that New Zealand is facing a power crisis. Each winter Kiwis face an uncertain future. Will there be enough electricity for hot showers will the lights stay on or will they go off? Will there be enough energy to run our industries? Will there be enough energy to provide certainty to industry to attract capital either foreign or domestic into that type of infrastructural development? However this piece of Government-sponsored nonsense will not achieve that certainty. Will this legislation answer the most often-asked question by people overseas who are thinking about investing in this country which is “Will you guarantee a constant and competitive source of electricity?” Jim Anderton bangs on and on about the wood processing strategy in the forestry industry but when one talks to the forestry people they say there are two gigantic flaws in Mr Anderton’s strategy. One is the Resource Management Act and the other is a lack of certainty with regard to the constant source of energy. 
So will this legislation deal with those questions? The answer is that it will not. This legislation typifies what is wrong with this Cabinet. I could write their collective commercial experience on the back of a 45c stamp with a carpenter’s pencil. They simply do not know how to respond to this problem so they are captured by textbook solutions and some very very willing officials. This legislation is the bureaucrat’s answer to a pragmatic problem. 
Unlike Mr Anderton I will not bang on and on about the complexities of this industry—and I do agree that there are some complexities. However the reality is that we do not have enough generation in this country and no amount of Government-sponsored nonsense like this will deal with that issue. Rather than face that simple fact this Minister invents the Electricity Commission as the panacea to all our energy problems. 
Thirty years ago we had first-class infrastructure around energy in this country. But our regional economies have boomed and our population has grown by a million. In Canterbury alone driven by irrigation the demand for energy is now twice as much as two Dunedin Cities combined. What do we get from this Government? The Electricity Commission as if it is the answer! It simply is not. But it is apparent that we will get it whether we like it or not. It would have been nice to get a model that actually works but this arrogant Minister would not listen to some of our leading industry experts. Submitter after submitter came to the select committee and told the Minister that this process simply would not work. Companies like Contact Energy Mighty River Power Powerco Meridian Energy Transpower—all major electricity users groups—and the list goes on and on. But would the Minister listen? Absolutely not! 
The overwhelming number of submitters expressed concerns about the Electricity Commission’s design. It will create an institution with advisory operational and regulatory roles that place it in serious risk of performance failure and judicial review. Under this bill the Electricity Commission is to be a policy adviser proposer of regulation and rules purchaser and/or provider of market operations purchaser of reserve power seller of electricity in dry years adjudicator of fines and penalties industry facilitator promoter of energy conservation decision maker over investment services and prices of State-owned enterprises and Commerce Act regulator of the prices and services of distribution and transmission companies. With the best will in the world no matter how well managed no company can manage effectively with that range of conflicting roles. 
It gets worse. The Electricity Commission will not achieve satisfactory independence while it is subject to Government policy and ministerial intervention. We were warned at the select committee that these provisions are incompatible with a regulatory institution and are in stark contrast to the independent processes associated with the Commerce Commission as an example. The implications for investment in the electricity industry for this country are immense. 
In the absence of safeguards against regulatory appropriation businesses subject to industry-specific regulation will protect themselves by simply under-investing in this industry. What is worse is that the industries that do invest will expect a higher rate of return than they would have otherwise sought because they have to mitigate the risk that is being imposed on them. 
The investment that does occur will be those types of organisations that have a direct door to the Minister—ministerial-friendly companies. What we will get are those organisations that are the mates of “Blackout Pete” applying and no one else will. The commission will work against investment and that is exactly what is needed if we are to avoid further crises in this country. That is why the National Party is totally in support of the removal of any limits on line companies entering generation subject to normal Commerce Commission oversight to make sure that they are not employing any anti-competitive practices. 
That we need investment in lines companies is absolute but what will happen is the greatest tragedy of all. Line companies with fat balance sheets will simply invest in other people’s economies. That will be a tragedy of huge proportions for New Zealand. With what has been suggested by this Minister that may very well happen. 
Finally I want turn my attention to the gas industry. There is no doubt that investment in this industry is expensive and risky but if observers ever wanted a bare example of this Government’s naivety directing business to share their infrastructure is it. This is not one of “Blackout Pete’s” better ideas. This is the rationale: investment in infrastructure is expensive and risky; if company X—and let us call company X “Shell”—does invest and strikes it rich we will tell all its competitor companies to use Shell’s infrastructure. 
Dave Hereora 
: Rubbish! 
BRIAN CONNELL 
: Well that is what he is suggesting. And there is one big flaw in that suggestion is there not? Why on earth would one invest hundreds of millions of dollars into research development and expansion in this country and then be directed by the Government that one must give one’s competitors a leg-up—one has to share the infrastructure? What that would do for one’s competitors is keep their prices down and eliminate risks for them. Does anyone bar this Minister think that will attract foreign investment in our electricity or gas industries in this country? If so they are in a very very small minority. For goodness’ sake! I tell the Minister to get real resign or at least get something more pragmatic and sensible in place before he plunges New Zealand into a permanent state of darkness. The Minister should get real. 
Hon PETE HODGSON (Minister of Energy) 
: 
 The member who has just resumed his seat has the dodgiest CV of any member of this House. He has been investigated by his own party at a high level. He still has not come clean. He says that he is a consultant a banker and someone who works for international conglomerates. The truth is that he owns a farm on the Canterbury Plains. 
Recent history of electricity in this country is that 30 years ago when that member said we had perfect infrastructure we were just getting through the 1975 crisis. That was what was going on then. But within years some bright spark said that we should stick a high dam across the Clutha River near a town called Clyde which happened to be on a fault line. We spent millions of dollars grouting the bottom of the river and then we spent millions more deciding to put a road through to Cromwell where the road did not want to go. Then we spent millions of dollars tunnelling into the hillside and we decided we needed to do that because if we did not de-water the escarpment then the lake would cause it to lubricate and fall into the lake which had just formed and overtop the dam that had just been built. 
That was the Clyde Dam. That was part of “think big” that was Mr Muldoon that was Mr Birch and that was part of the 410000 jobs that were going to come from “think big”. Search parties have gone out looking for those 410000 jobs. They have searched the dominion high and low including the off-shore islands; many of them have not returned but no jobs have been found. So that was the history of the National Party and electricity. 
But wait there is more. The National Party decided it was going to learn from its mistakes so it decided it would deregulate. It decided it was going to privatise. It decided it was going to go to free market and it decided that the market and the price discovery arising from the market would result in just enough electricity—not too much not too little at just the right price that the market would always clear that the people would always be happy and that the lights would always stay on. 
That is what happened with the National Party. It went from one extreme to the other and so we saw the split of ECNZ and its partial privatisation—we put a stop to the rest of it. We saw the so-called “Bradford reforms” which were based on the idea that no one who owned a line could also own an electron—a remarkable bit of public policy. That saw the whole of the electricity industry turned on its ear and a whole lot of people forced to sell assets that their communities had paid for over tens of years—indeed in some cases in Dunedin over a century. That was the “Bradford reforms”. The market would provide; there would be no need for anything! 
 And then guess what happened? In 2001 it stopped raining. What happened then? We started to run out of electricity. Did the price go up? Yes. Were people happy about that? No. Were we going to run out of electricity? Yes. So the then Government this Government intervened in the form of a very substantial conservation campaign. We got a response from the public and we got ourselves out of the mess occasioned by “no market”. In 2003 it happened again. At that stage we said we had had enough. We had put legislation through the House in 2001. It was strongly opposed by the National Party. The Government said: “We will need backstop legislation to set up an Electricity Commission if we need one.” The National Party said that the legislation was draconian. They said it was outrageous. They voted against it. They made a noise even greater than the noise they are making now and when we needed that legislation in May 2003 we put it in without a whimper because the Tories got it wrong again. 
The Tories get it wrong all the time. That is why we have gone from the extremes of “Rob Muldoon and Bill Birch know best” through to “the market knows best” and now we have a managed market and a regulator. Now we have something roughly the same as what the rest of the world has. This legislation completes the job. It gives the commission a few more tools. It does for the gas industry what we have already done for the electricity industry. It means that we have a future in which we can have a little more certainty than we have had before. It allows reserve generation to be built. 
Guess what? We have already built the first bit of reserve generation and I will tell members where. It is at a place called Whirinaki just north of Napier. I will tell members something else about that site. The reason we used it is that there used to be a power station there. Several weeks ago we opened 150 megawatts of diesel. What happened was that the site had already been used in its history for a certain amount of power generation. It was 150 megawatts of diesel. Does that sound familiar? What happened to that 150 megawatts of diesel? I will tell members what happened. The Tories went free market and the plant was picked up by Contact Energy which had become the owners of it under privatisation. They sold the last bit of it in March 2001 just as the rains had stopped. That is what happens when the free market is allowed to go to work. 
Brian Connell 
: Why doesn’t every industry expert agree with you? 
Hon PETE HODGSON 
: The member has decided that he is in favour of the National Party policy. Who knows what it is? He is clearly the next Opposition spokesperson on energy. Until now it has been Roger Sowry before then it was Pansy Wong before then it was Gerry Brownlee and before then it was Max Bradford—although that is a swear word these days. It cost him his job; he has left politics. That party changes its energy spokesperson every 12 months and none of its members get up to speed. 
Just contrast that with the United Future party New Zealand First the Greens—all of those parties know what they are talking about. The Tories do not know what they are talking about on energy and have not known since Doug Kidd ran the show. There was a Minister who did know something about energy. We have a situation where the Tories having a history that has failed at one extreme failed in another extreme and is now busily recirculating its energy spokespersons is going to run out of caucus members. Before too long there will be not one person in the National Party who has not had the energy portfolio. And still they will not know anything about it because they have all held it for about 8 months or whatever. 
So I welcome the new member into the energy portfolio. I congratulate him on his outrageously stupid beginning. I think that is exactly the same beginning that has been made by three or four predecessors. He will get better as they did. As soon as he has worked out how to spell the word “energy” he will have the portfolio taken off him and it will be given to someone else—probably Lindsay Tisch. 
I say to National Party members that they should be supporting this legislation because it is sensible. But because they do not understand the policy at all and never will I do not expect their support. We do not need it and just as well. This is a House of Representatives and those representatives represent those people who choose not to understand. 
I say to the National Party to please try to get a grip on what is happening in the energy portfolio. Please try to understand that their history is far from proud. The 410000 jobs never arose. The free market did not work. Electricity is not baked beans. It will never be baked beans. The National Party has not worked that out. I understand that National Party members in the select committee opposed the raising of the threshold. 
Debate interrupted.