International Energy Agency New Zealand 2017 Review Energy Trusts of New Zealand October 2017

IEA Review New Zealand review released in February 2017. Focus on electricity distribution businesses. In particular, structure, governance and regulation of distribution businesses. ‘Traditional’ criticism regarding the number of distribution businesses coupled with the challenge of keeping pace with technology.

Perceived issues with Distribution Businesses High number of EDBs (29). EDBs facing growing complexity with disruption and technology change. Untapped opportunities for regional service agreements and joint ventures. Minimal oversight with unregulated exempt trust-owned EDBs.

What the IEA thinks of EDBs “There are emerging concerns with regulated distribution businesses being able to compete in unregulated parts of the sector.” “…the platform for services model could support more efficient and transparent transactions.” “...the Council of European Energy Regulators has concluded that distributors should focus on becoming ‘neutral facilitators...”

What it thinks should be done “Real-time co-ordination and communication capabilities may need to be enhanced [with Transpower and other distributors]”. One response would be to pursue a programme of amalgamations” or “through more co-ordinated management and delivery of distribution services.”

… What it thinks should be done A range of options could be considered, including: regional services and management agreements between distributors; formation of joint ventures to manage and operate distribution ssets on behalf of distributors; amalgamation of distributors.

What it thinks of Trusts “…recent investment in non-core activities may have exposed some distributors to business risks that they are ill-equipped to manage, reinforcing concerns about the ongoing effectiveness of a corporate governance model based on community ownership. “

How do we respond? Defend: Provide counter arguments to criticisms. Positive action: Explore greater service co-operation among smaller EDBs. Opportunity: Extend the value in community ownership into greater “customer advocacy”.

Defend Number of Trusts not problematic - compare to Europe. Re-cast the strong benefits of Trust ownership. Highlight community ownership viewed globally as increasingly valuable. Clear rationale for regulatory exemption for many trust-owned EDBs. Highlight strong public support for community owned trust ownership. Local ownership = local dividends PLUS tax paid (contrasted with overseas ownership). Favourable Auditor General report. Productivity of EDBs already assessed through Commerce Commission Information Disclosure Regulation. Potentially commission a “positive story” report of trust ownership.

Example: How New Zealand Compares to Europe Country Population Number of Electricity Distribution Businesses Austria 8.75 million ~138 Estonia 1.32 million ~36 Finland 5.49 million ~80 France 66.90 million ~158 Italy 60.60 million ~144 Norway 5.23 million ~148 Sweden 9.90 million ~173

How New Zealand Compares to Europe continued The countries highlighted have among the lowest number and duration of interruptions (measured in minutes lost per year) across Europe. The number and duration of interruptions for each country are under 100 minutes per year.

Example: Ontario Review The conclusion in a 2011 Ontario Distribution Sector Review that larger EDBs tend to be more cost efficient does not hold true in New Zealand. EDB Information Disclosure data shows that operating costs as a percentage of the total assets of EDBs don’t necessarily decline as the number of customers per EDB go up. There is also a large efficiency range for small EDBs, which suggests that EDB size is not the most significant factor affecting efficiency. In 2013 the New Zealand Commerce Commission concluded: The level of efficient operating and capital expenditure does not just depend on the scale of network (such as that measured by the number of customers or the length of network) but also on other factors such as changes in the cost of inputs, and other characteristics of distributors, including the condition of assets, the growth in new connections, and the geographic characteristics of a network.

Example: Inefficiency across the ditch Australia has an extremely consolidated distribution network. Increasing network costs demonstrate that a consolidated network does not necessarily create cost efficiency. According to the Australian Federal Treasury, approximately 51% of the electricity bill goes towards network charges. By comparison, distribution network charges in New Zealand are approximately 26% of the bill.

Positive Action Existing examples of EDB co-operation. Changing nature of potential services able to be traded among EDBs. Appetite for greater service co-operation and knowledge sharing around new technology.

(slide of services?)

Opportunity IEA report clearly identifies a lack of a strong customer advocate group in the New Zealand energy market. Opportunity for Community Trusts to play greater role in energy customer advocacy. Particularly relevant during this time of change and the rise of the “prosumer”. Energy costs will continue to be politically important. Trusts able to harness otherwise dispersed consumers with traditional “small voice”.

Conclusion The Review produced no new arguments – other than highlighting the increasing challenge of new technology. In the near future the Electricity Authority, Commerce Commission and Productivity Commission will all be examining EDBs and their ownership structures. Proactive steps needed by ETNZ in the context of closer review and critique. Potential avenues for action are not mutually exclusive. The information exists to reiterate the benefits of the current structure. New opportunities exist around customer advocacy to further the value of Community Trusts.