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Regulatory Update – November 2017

Home Insights Regulatory Update – November 2017

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Contributed by: Craig Shrive and Felicity Ellis

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Published on: November 02, 2017

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Labour-NZ First Coalition Agreement includes full-scale review into retail power pricing

The Labour-NZ First Coalition Agreement states that the new Government will "conduct a full-scale review into retail power pricing". Officials are no doubt already working on what this might entail, given that the new Minister of Energy, Hon Dr Megan Woods, would like terms of reference approved by Cabinet within the first 100 days. However, at this stage, we await further detail.

The Coalition commitment to a review is clearly inspired by NZ First's policy to "conduct a full inquiry into high retail electricity prices". The NZ First policy also notes that "recent reviews in the UK and Australia have found major issues with similar 'market reforms' we adopted here".

In that context, recent UK developments are not encouraging for New Zealand electricity market participants.

Developments began with an inquiry into retail electricity prices by the Competition and Markets Authority (CMA) in 2014. The final report, published in 2016, outlined 30 possible remedies for issues regarding competition in the retail market. The regulatory authority (Ofgem) published, and has begun implementing, a strategy for reform of the sector, in response to the report. Further information can be found here

A core underlying problem identified by the CMA in its inquiry was the lack of customer churn, which gave market power to suppliers. Such findings will not necessarily translate to New Zealand, where the Electricity Authority frequently reports on increasing retail competition and innovative new service offerings, and is active in facilitating customer switching, such as through the "What's My Number" website.

In response to the inquiry, the UK Government recently published the Draft Domestic Gas and Electricity (Tariffs Cap) Bill. The Bill would require Ofgem to implement price caps for customers, as soon as practicable after the Bill becomes law (likely UK Spring 2018). Customers on prepayment meters are already subject to price caps implemented by the CMA. In exercising its power under the Bill, Ofgem is required to have regard to certain considerations including: protecting customers; incentivising retailers to improve efficiency; enabling effective competition; maintaining incentives for domestic customers to switch to different domestic supply contracts; and ensuring that efficient retailers can still generate enough revenue to finance activities. The full text of the Bill can be found here.

The ACCC in Australia is also conducting an electricity supply and prices inquiry, following direction from the Treasurer in March this year. The terms of reference, which can be found here, may serve as a model of sorts for a New Zealand inquiry. The Commerce Commission does not yet have power to undertake a similar inquiry here, but the previous Government had committed to providing that power (with fuel prices top of mind at the time), so that path remains a potential option.

The ACCC has released a preliminary report on possible amendments to the industry, which can be found here. A key finding is that the severe electricity affordability problem in Australia, which is due to a lack of competition in the generation and retail markets, is putting Australian businesses and consumers under unacceptable pressure. 

If the inquiry in New Zealand is as comprehensive as the Australian approach, then transmission and distribution pricing will also be examined, as they are key parts of the retail bill. In its report, the ACCC noted that transmission and distribution are the largest component of retailers' costs, but that these costs are unavoidable. Although increases in network charges are subject to revenue caps, the price increases that have been allowed (due to capital expenditure on ageing assets, stricter safety standards, and increased demand) have not been borne equally by all customers given discretionary tariff structures. This has made it difficult for retailers to present meaningful comparison rates relating to offers for customers. Further, the report noted more generally that customers had not received value for money from investment into distribution networks, as the relative efficiency of electricity networks had decreased over time.

Against that background, in New Zealand some industry participants have been quick to start directing attention at where they believe the problems lie. The Electricity Retailers Association (ERANZ) has publicly stated that given the significant contribution of distribution to retail pricing, any unreasonable pricing faced by end users is not an indication of anti-competitive behaviour by retailers. We expect a unifying theme for all participants will be the need to remove the low fixed charge regulations, which hinder innovative offers to consumers

In summary, electricity pricing and affordability is a political priority and, as demonstrated by the UK and Australia experience, it would be overly optimistic to think that any inquiry will paint the sector in a positive light and/or will not recommend regulatory change.  

 

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