Low fixed charge regs to go

Low fixed charge regs to go as Govt looks to reduce household power costs

The government’s low fixed charge regime for power pricing is to be phased out as part of a suite of measures intended to put downward pressure on household electricity costs and increase competition.

The 15-year-old regulations, originally intended to encourage power conservation and limit costs for the smallest power users, have been overtaken by new technologies and increasingly exacerbate hardship for large, low-income families.

The government has tasked officials with developing specific proposals for phasing out the regime. The final report from the independent Electricity Price Review, also published today, had recommended a five-year phase-out.

Other measures announced today include the creation of a consumer advisory council for the sector, a ban on retailers’ prompt-payment discounts, increased obligations on generator-retailers to offer power into the futures market, and quicker consumer access to their consumption data.

“Helping Kiwi families meet the cost of living is a long-term challenge for New Zealand,” Energy and Resources Minister Megan Woods says.

“We can’t fix it overnight or in one fell swoop, but there are a range of practical things we can do to tilt the balance in favour of consumers while adding more competition to the marketplace to take pressure off the monthly power bill.”

The government has spent the past four months considering the review panel’s final report and is acting on 20 of the group’s 32 recommendations.

Many of the issues highlighted in the review were already being worked on by the Electricity Authority. In several cases the government has urged faster work, or a specific approach, to the authority, rather than the government itself taking more direct steps.

Prompt-payment discounts, already discarded by Meridian Energy, are to be banned, but the government plans to do this through quiet coercion rather than specific regulation.

The review panel says the discounts are effectively a late-payment penalty that disproportionately harm low-income consumers and make it hard to compare pricing plans of competing firms.

“Rather than immediately regulate retailers, the Minister of Energy and Resources will write to the industry setting out the findings of the review and the expectation that they make discounts available to all consumers and reflect the true costs of managing late payments from their customers.

“When Meridian did this, it handed $5 million back to consumers. Should the companies not follow suit, we will regulate,” officials say in a note on planned actions.

As well as establishing a consumer advisory council – expected by the panel to cost $1.5-2.5 million a year – the government wants a better definition of energy hardship and data to measure it and will establish a cross-sector group to deliver improvements.

Voluntary industry codes for protecting vulnerable and medically dependent consumers will be made mandatory and a fund will be created to help households in hardship become more energy efficient.

A national network of advisors to help consumers with home energy use, picking plans and switching will be established, and the price comparison websites operated by the Electricity Authority and Consumer NZ are to be merged.

The review panel’s initial options paper, published in February, found no evidence of excessive profits among retailers or network companies. It rejected price caps and formal separation of generation from retailing and was more focused on eliminating the “two-tier” retail market it said had developed, in which those with the means to shop around for good deals benefited at the cost of other consumers.

Nevertheless, the government is acting on its recommendation that the authority establish a set of common accounting rules against which firms with both generation and retailing must report the earnings from those respective businesses.

The authority has also been tasked with greater monitoring of wholesale prices – something it already does – against the cost of new-build generation.

The review found that between 400,000 and 750,000 households may never have switched supplier since records began in 2002. It recommended the authority run a pilot scheme – as its counterpart in the UK has done – to offer a bulk deal to those most likely to benefit.

At this stage, the government is requiring only that the authority develop a business case for such a pilot.

In the wholesale market, the government intends to make voluntary market-making in the futures market mandatory unless the industry can come up with a more effective solution quicker.

The country’s four biggest generators - Meridian, Genesis Energy, Contact Energy and Mercury NZ – currently offer volume into the futures market under a voluntary agreement with market operator ASX and the authority.

But longer-dated contracts lack liquidity, hampering new entrant retailers, and pricing under the voluntary arrangement tends to break down during dry periods or gas shortages – just when it is most needed.

The review panel recommended imposing a broader, mandatory market-making obligation unless the authority can develop an incentive-based scheme by then.

Earlier this year, the authority said including some of the next tier of generator-retailers, such as Trustpower, Nova Energy and Pioneer Energy, might deliver quicker improvements than moving to an incentive-based scheme as that adopted in Singapore.

Under that model, the firms with the best assets to offer futures are paid by the market to provide that service.

The review panel also recommended the government issue policy statements to help resolve the industry’s decade-long debate over transmission pricing and to help speed up the authority’s work on changing the way network companies charge for their services.

The change in distribution pricing, intended to ensure customers installing solar and batteries still pay their share of network costs, has the potential for “price shocks” for some consumers and the government does plan to issue a policy statement to help direct that process.

But the government is holding off on a policy statement on transmission pricing, given submissions have only just closed on the authority’s latest proposal to base charges on the benefits consumers receive.

That proposal, while still increasing costs for many large North Island industrial users and benefitting South Island generators and lines companies in the lower South Island and lower North Island, will have much less financial impact than earlier plans.

Lower interest costs, the delay in implementation until 2022, and a reduction in the number of post-2004 transmission projects that will be captured by the proposed benefits-based charge have more than halved the costs – and gains – some firms stood to book from the change.

The government will issue a policy statement, after taking advice from the authority, ‘if it becomes apparent that further government guidance in this area is warranted,” officials say.

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