Electricity Reforms Need Kick-Start Now

Ken Shirley Speech notes from NGC Winter Series; Wellington; Monday August 23, 2004.

I wish to congratulate and thank Phil James and NGC for hosting the Winter Lecture Series, the success of which is expressed by the eager attendance of you all.

I also wish to thank Murray Jackson, CEO of Genesis Energy, for his thought provoking address this evening.

Economic prosperity and the well-being of New Zealanders are underpinned by three key factors.

The first factor is our temperate moist climate underpinning the food and fibre production from our farms and forests.

The second factor is our comparative high levels of education and innovation (many would argue that these are in serious decline).

The third factor is the availability of energy at international competitive prices which allow us to process our primary outputs be they butter, cheese, cachinnates, pulp, paper, meat packs, fish, aluminium or tourist packages.

Added value processing is only viable if energy is efficiently produced and competitively priced. Without it we are doomed to a downward spiral in the prosperity stacks - mere hewers of timer and carriers of water.

Energy security is vital to our economic wellbeing. As a remote island nation we cannot import electricity from an adjoining neighbour - we are on our own.

Obviously we can import fuel to generate electricity but at both a financial and vulnerability cost with the fluctuating exchange rates and serious risks of disruption of supply.

In view of the above, the fact is I cannot comprehend the present Government's stated objective of deliberately driving up the price of energy so that more expensive and trendy renewables can better compete.

This is simply saying lets, as a trading nation, deliberately reduce our international competitiveness in all of our key exports.

The Government's only explanation for this strategy seems to be their foolish adherence to the fundamentally flawed Kyoto Protocol and messianic determination to be global leaders at UN forums by wearing the thickest and scratchiest hairshirt.

Historically the integrated state-owned and operated electricity sector gave us supply security. The lack of market principles and pricing mechanisms however denied us the ability to supply to meet the demand at an optimal price.

In the days when we all subsidised each other we could bumble through with government imposed price controls and all manner of distorting interventions. Hopefully those days are long passed, or at least they should be.

In the big picture the partial privatisation and deregulation of electricity has been a success story but now we seem to be stuck in the middle of the road like a mesmerised possum not sure which way to go.

We risk suffering the worst of both worlds. On the one hand, a lack of security of supply and on the other hand, we will not enjoy optimal pricing because we have failed to embrace the robust competitive market model.

Recent trends have seen the creation of new monopolies and an increasingly regulated environment. More market and less government would appear to be the obvious pathway forward but there is a clear lack of enthusiasm and commitment from the present Government.

Some serious errors have been made in our electricity reforms:

1. The forced split between lines and energy companies was unnecessary. The previous government appropriated property rights without compensation. There is no better way to destroy investor confidence particularly the much-needed foreign investment and innovation, which the energy sector needs.

2. The three SOE gen-tailers; Genesis, Meridian and Mighty River have been given dominant positions. Not surprisingly these dominant positions have been used to establish regional monopolies. All monopoly powers are abused and compliant shareholding Ministers can be easily bought off with hefty dividend payments.

3. The lack of investment and innovation by the SOE monopoly transmission company Transpower is a disgrace. The rundown of our national grid is a major factor in our present vulnerability and exposure to exorbitant price spikes.

4. The Government's haste in underwriting the reserve generation capacity at Whirinaki and the more recent underwriting of Genesis Huntly combined cycle gas plant both send the wrong signal further diminishing the prospect of attracting much needed private sector investment and participation.

The Government's commitment to the Kyoto Protocol totally distorts future investment decisions and fuel choices. By appropriating the forest owners carbon credits and dispensing largesse to chosen industries and generators the Government progressively puts its hands on more economic levers. Each control measure begets further control with the risk of regression to a command economy.

The establishment of the Electricity Commission is another example of heavy-handed regulation signalling the Government's propensity for intervention and control.

We have come a long way from 1987 with one Government owned generator and local government supply authorities.

Our reforms however are stalled and it is surely time to surge ahead with more privatisation, more market and less government.

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