Review - The 1998/99 Electricity Reforms
(By Hon Max
Bradford, Former Minister of Energy)
It has been
nearly 3 years since the last major stage of the New Zealand reforms
to introduce competition into the electricity market were implemented.
As they have been elsewhere in the world, the last stage was perhaps
the most controversial, so it is timely to review whether the objectives
of the reforms have been delivered.
of introducing competition to the New Zealand electricity market
began in 1986. They have been complex and often controversial, over
the life of three governments and five Ministers of Energy.
The early stages
of the reforms, in the early 1990s, were designed to introduce
effectiveness and efficiency into the electricity generation, transmission,
distribution and retail supply sectors of the electricity industry.
The full chronology and explanation is set out in the Electricity
Reform Chronology document on this website.
of the last stage, implemented on 1 April 1999, were clear: to deliver
choice (of electricity company) and lower electricity prices (both
wholesale and retail) to consumers.
Proof of the
promised results for consumers is now clearly available from official
sources. Nevertheless, there was a very difficult period for some
months for many people, as companies and consumers adjusted to the
new competitive market in the months after 1 April 1999.
Government expected some difficulty as the major changes bedded
down; but I think it would be fair to say that everyone, including
me, was caught by surprise at the extent of the disruption for some
parts of the country.
In part, this
was because some companies did not support the reforms. Some in
the industry suspect a few companies of unnecessarily complicating
and delaying the customer switching processes. Consumers who wished
to switch power companies were subjected to behaviour quite at odds
with what you would expect from service-oriented, customer-focussed
many power companies discovered that their back-office billing systems
could not cope with the volume of switching which occurred, and
some companies had difficulty in integrating different customer
billing systems as the new structure of the industry bedded down.
I regret that we did not allow a longer period for the introduction
of the major changes. We acted on the best advice on implementation
at the time, which in hindsight proved to be wrong. For that I have
to accept responsibility and I do so, unreservedly, as I have said
publicly on a number of occasions.
We promised consumers choice and lower power prices. Well over 90
percent of New Zealanders are enjoying the promise. Very few areas
of New Zealand have yet to get full choice and some people are paying
more for their power for a variety of reasons. Only 2.8 per cent
of New Zealand electricity consumers face a monopoly; over 60 per
cent can choose from 5 or more companies in their area.
But National never promised 100 percent to 100 percent. Compared
to the years before the reforms, most people - by far - are
is at least as good as, if not better than, the benefits which have
accrued to millions of electricity consumers in other countries
where competitive electricity markets have been introduced.
More Choice of Electricity Supplier
to choice, New Zealand has one of the highest switching rates of
OECD countries which have introduced competition into their electricity
markets. This is the clearest measure of consumers exercising choice,
where they want to switch from one company to another to supply
Over 755,000 New Zealander consumers have chosen to change their
electricity supplier (some more than once) since the reforms became
effective on 1 April 1999. Around 20-30,000 consumers switch electricity
supplier each month even now, three years after the reforms took
effect. The vast bulk of these people clearly have switched satisfactorily.
Not everybody did in the few months after April 1999; but that is
hardly surprising given the behaviour of some companies towards
their customers when competition was first introduced. Thankfully,
this behaviour is rare now and the industry has imposed penalties
on itself for non-compliance with quite strict switching rules.
On the price
side, the charts and tables enclosed show that for a wide array
of consumer categories, nominal prices have either fallen quite
steeply or, in the case of households, the rate of increase has
consistently flattened off for the first time ever. If we adjust
for inflation, in every case electricity prices have fallen, in
some cases quite steeply. In fact the picture is better than these
statistics, as the rebates paid by many lines companies are not
reflected in the prices measured by these official sources. Recently,
prices have begun to rise again, but this is to be expected.
But for the
Labour/Alliance/New Zealand First/ ACT blocking of the regulation
of monopoly lines companies introduced into Parliament in July 1999,
prices would have fallen even further, especially for households.
Recent academic research has shown that consumers are paying something
like $200 million more in lines charges than they should be.
We should not
forget, either, that many communities around New Zealand have got
a windfall benefit from the change to the structure of the industry.
Local power companies were required to split into two companies;
one which retailed electricity to customers, and the other into
a local monopoly lines company.
Most chose to sell the retail customer base and take a healthy profit
on the value of their local electricity consumers. The decision
to sell was not a requirement of the reforms, but the choice taken
by locally elected boards. It was possible for local power companies
to split into two locally owned trusts; one for retail, one for
lines, providing they were quite separate in management and governance
control. This would have kept the power companies in local hands.
The result of
these sales was that there is now something like $2 billion sitting
in a variety of community trusts and local power company trusts
around New Zealand, which are used either for rebating the profits
of the lines companies, or for charitable purposes in their communities.
Often this has
been to the disadvantage of electricity consumers in their regions.
The price paid for customers by the retail electricity companies,
and demanded by the locally elected boards was, in my view, excessive.
This has helped contribute to the fact that household electricity
prices have remained higher than they should be in some parts of
New Zealand, even given the existence of the newly competitive markets.
These were local, not central government decisions.
Sale of Assets
Government has sometimes been accused of selling locally owned power
companies. This is utterly untrue.
(ESAs) or local government owned these companies. Therefore, central
government was not in a position to sell them. Any decisions to
sell were made by local body politicians or locally-elected ESA
The only electricity
asset sold by central government was Contact Energy, which was floated
to New Zealanders as well as to a cornerstone shareholder; and a
small electricity company in the South Island, which was sold to
the local community in the late 1990's.
All other state-owned
assets that made up the old ECNZ (Transpower, Meridian Energy, Genesis
Energy and the Mighty River Power Company) remain in government
Is New Zealand the odd-man out in creating a Competitive Electricity
The answer is
no. We are mainstream.
You might be
interested in the summary pages of this recent document published
by the OECD , which has examined the comparative performance of
electricity reform across the OECD countries.
There is nothing remarkable about the reform process we engaged
in - a process, which has been under way over the last 15 years,
long before I became Minister of Energy.
The stage we
undertook in 1998-99 was the last substantial change necessary to
achieve a fully competitive market, with one exception - the regulation
of monopoly lines companies.
it in 1999, the Labour/Alliance Government is now dragging the chain
on the regulatory process for monopoly lines companies, which we
wanted to do in 1999. That has cost consumers about $200 million
so far, as noted already.
quote from the OECD document might put our reforms into context:
all OECD countries have decided to open up their electricity markets,
at least to their big industrial users. In many countries electricity
markets will be open to all users, including households. This
is already the case in Finland, Germany, New Zealand, Norway,
Sweden, England and Wales in the UK, and several states in the
US and Australia.
year 2006, more than 500 million people (and all large industrial
users) in the OECD area will be entitled to choose their electricity
supplier. This accounts for nearly 50% of the population of OECD
drawn from the OECD publication is that New Zealand has undertaken
a best-international-practice electricity reform package. As with
many other countries, there were stages of the reforms that were
pretty rough for some parties; but the end result is much better
for consumers, as compared to the monopoly electricity system it
as that transition process was for some, the larger, and long-term,
benefit of choice and lower prices has been achieved. I would be
the first to admit the widespread consumer perception in the New
Zealand public is that the introduction of a competitive electricity
market has been disruptive and, some might say, has not worked.
That is a perception that will be gradually replaced by the facts,
hopefully. To return to the old central/local government monopoly
days would be folly and a tragedy for consumers.
fact that the Labour-Alliance Government has not attempted to undo
the reforms of the last 15 years, and in particular the latest stage
of the 1998/99 reforms, indicates the direction of change was correct
and in the interests of consumers. Claims by the present Minister
of Energy that they "can't" be undone are utterly specious:
if his Government wanted to create notionally integrated electricity
monopolies again, it could. But to do so would remove competition
and choice for consumers, a step which would undoubtedly be opposed
by consumers, and to its political cost.
Of course, the
perception that the reforms didn't work was accentuated by the 2001
hydro so-called "crisis". Some claim the "crisis"
was caused by the reforms. If there was a crisis, it was caused
by a lack of water, not the reforms. In fact the competitive market
coped better than in 1992 when we last had a hydro crisis. Some
companies were excessively exposed to the spot market and did face
some weeks of very high prices: these prices have now come back
to pre-hydro crisis levels. The higher prices had the effect of
reducing demand, and therefore keeping the lakes at sustainable
That is how
markets are supposed to work, and is infinitely better than the
old system when bureaucrats, or politicians, invariably made the
wrong decisions. Any commercial mistakes made (e.g. by not hedging
against dry years and buying power substantially through the spot
market) are now borne by the shareholders, not by consumers, which
is what has traditionally happened. And that is how it should be:
consumers shouldn't be the scapegoat for poor commercial decisions.
It is seeping through, after all the criticism that Labour and the
Alliance hurled at National in 1998 and 1999 when we were formulating
the last stages of the reforms, the present Government does not
intend to abandon the competitive electricity market at all. Indeed,
Clark and Hodgson have made it clear that the competitive electricity
market is here to stay with only minor tweaking, most of which we
would support. Is this political hypocrisy, or facing up to reality?
You make the decision.
Hon Max Bradford
20 April 2002