1. Molly Melhuish consumer advocate 1 supported by Auckland Greypower June 2012

2. NZ is the only country in the world that allows industry to regulate itself this enables companies to maximise their profits asset sales would lock this in 2

3. NZ is the only developed country that did not reduce household electricity prices after the recession 3

4. 4

5. 5 NZ the only developed country with relentless price rises over the long term

6. 6

7. Quasi-monopoly pricing for domestic consumers assures suppliers returns on their investment the monopoly is not on the supply businesses, but on control of the regulator 7

8. How deregulation happened 8 Electricity Act 1992 deregulates electricity Labour, 2000, sets objective to ensure efficient, reliable, fair, sustainable electricity supply, and promote energy efficiency industry refuses to implement Labour’s changes

9. Consumer rights extinguished! Electricity Industry Act 2010 removes concepts “fair”, “sustainable”, “all classes of consumers” Electricity Authority interprets this saying that wealth transfers from domestic to industrial consumers are legal and desirable Authority protects investors not consumers 9

10. Thus the 2010 law effectively changed the objective of regulation 10 electricity no longer treated as “essential service” electricity now developed to promote economic growth

11. How NZ’s pricing works domestic consumers pay – costs of electricity from new power stations – additional costs of competition – and costs to renew transmission and local lines the largest industries negotiate prices down to around the cost of running existing power stations this means domestic consumers are subsidising industrial consumers 11

12. 12

13. Impact of asset revaluation 13 In NZ’s pricing system, the value of assets is not the cost to build them, but what they will earn. as prices rise, the assets are revalued, so the return on assets remains within “reasonable” levels. In 2010, half the value of both “gentailers” and lines companies is from revaluation, not cost to build

14. Scarcity pricing 14 shortages are profitable, so companies create scarcity and push prices upwards shortages in dry years gave power companies $4.3 billion between 2001 and 2007 2010 Act puts electricity shortages into the market, with scarcity pricing rules that allow increased profits Wholesale price reached $20/kWh for 7 hrs in 2011

15. Householders now pay more for electricity than rates Other household energy prices follow electricity price rises 15 Outcomes from pricing system

16. Outcomes from self-regulation dominance of the electricity sector spills over to pricing of other household energy forms energy conservation is unprofitable and must be supported by central government tariffs that could reduce peak loads are not supported by electricity retailers 16

17. Impacts of the pricing system Energy hardship – the sad choice, heat or eat – hospitalisation, elderly and babies susceptible to cold - 1600 excess winter deaths, one of the highest in world - illness, lost productivity, lost school hours 17

18. Impacts of the pricing system burden on small businesses – electricity price rises and risks of rate shock – energy efficiency and renewables businesses losing customers, losing government support, closing down - reliability suffers through incentive to create scarcity 18

19. Conclusions 1 domestic power prices are rising because of pricing rules that promote profit maximising NZ is unique in the world in its pricing system that exploits domestic consumers to support economic growth from industry expansion 19

20. Conclusions 2 electricity and other household energy is unaffordable for increasing numbers of householders cold houses are still a major health problem in NZ 20

21. Issues from selling assets likely public revolt against price rises threat of re-regulation 21

22. Issues from selling assets only companies with very deep pockets can manage risks, and offset them through their lobbying power hence large foreign companies likely to be the eventual owners corporate responsibility obligations of SOEs are lost 22

23. 23 Private companies charge 3.3c/kWh more than SOEs, Feb 2012

24. Some issues - regulation Electricity Authority condones large “wealth transfers” from small consumers to suppliers and major electricity users “code development principles” have no policy content but use “net national benefit” (NNB) analysis NNB example: 1992 leaky homes de-regulation may have had positive NNB – but incurred $11.3 billion financial liability ! 24

25. What to do – work within system work within system to minimise harm one advisory group has a DEUN member Grey Power nominee for another advisory group attend Authority briefings, raise controversial issues discuss issues with Authority staff and other regulators, e.g. alternative regulatory systems 25

26. Use technicalities of Code parts of the Authority’s foundation documents have room for interpretation, e.g. “If wealth transfers seriously undermine confidence in the pricing process or in the electricity industry more generally … then that can inhibit efficient entry and investment decisions and … these effects should be taken into account when evaluating proposals.” 26

27. What to do about it, longer term re-regulate electricity to treat it again as an essential service remove the right for power companies to maximise profits (price-gouge) regulate for genuine consumer representation and protection 27

28. Consumer protection required NZ consumer representatives - no access to outside expertise * Australia - strong independent and funded consumer advisory groups ~$2m per year UK has both government and independent consumer representatives, and is re-regulating US: different states have various consumer protection mechanisms but all receive public provision or support 28

29. Therefore: don’t even consider energy asset sales until regulation protects consumers not investors and has cross-party agreement on objectives 29

30. Bruce Jesson 30