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ELECTRICITY COMMISSION CALLED TO ACCOUNT

22 June 2008
By GARRY SHEERAN
We put a collective $230 million on the table to prevent a repeat of winter 2003 when power shortages threatened and prices skyrocketed and what do we get?
Something worse. A near repeat of the 1992 power crisis.

After a long, hot Indian summer, it seems winter rains are arriving at last, and as the lakes begin to refill, the prospects of power cuts recede.

Well may we say God is defending New Zealand because, in the eyes of consumers, nothing can defend the Electricity Commission.

Funded by an industry levy passed on to our monthly electricity bills, the commissionwas tasked to make sure the 2003 shortage didn't happen again. It appears to have failed, and it needs to step up and be accountable.

The inquisition has already begun.
The country's big electricity users invited commission chairman David Caygill to lunch on Wednesday, and for three hours put him on a grill turned up high.

"Yes, we are critical very," said Ralph Matthes, chief executive of the Major Electricity Users Group, on his way out to lunch.
"If the Electricity Commission had put more time into improving competition and securing power supply, instead of chasing policies on renewable energy that the energy minister [David Parker] has given them, then we wouldn't be where we are today," he said.

His organisation wanted a full review of recent electricity sector events, and the commission's role within that.

Some electricity industry sources have been critical of the low profile the commission has taken during recent months. "You'd have to say they have gotten away with not fronting up like Roy Hemmingway [the former commission chairman] did during an autumn dry spell two years ago," he said.

Another said: "What with recent events and an election later this year, there's going to be some big shake-ups in the commission before long."

Among energy consultants there's a view abroad that the commission is becoming no more than an arm of the government's controversial renewables energy policy (90% renewables by 2020 and no more base-load thermal generation). And while Hemmingway (sacked by minister Parker) was doing the job he believed needed to be done, Caygill was doing a job the government wanted done.

National energy spokesman Gerry Brownlee said the average household, besides sitting on the edge of a power crisis, was paying power prices nearly 50% higher than when the commission was established. "They've paid $230m for the Electricity Commission [over the last four years] but for what?"

Back in his Wellington office after an unexpectedly long lunch, Caygill said the commission was an easy target for critics because it hadn't been around long, and it was involved in a mix of different activities, some of which were hard for the "mums and dads" to understand.

"Right now security of supply is in the public eye. By Christmas it probably won't be. Of course it's a very important issue, but it's not something we spend every day and every dollar of our budget on," he said. And yes, he believes the country's power supplies are secure, despite the detractors.

"What we have is less of a margin of security than we would like, but there is still less than a 10% chance of involuntary load shedding," said Caygill. "That is not no chance, but it is a very small chance, and that after one of the driest May months on record, nearly as dry as the 1992 drought."

And that is a situation Caygill implies New Zealanders may have to get used to, unless they are willing to see the bottom line of their power bills grow.

A total 30% ($24.4m) of the Electricity Commission's annual costs (which last year totalled $76.4m) is spent on maintaining the power station in Whirinaki which was built in the aftermath of the 2003 crisis to provide emergency power when lakes were dry.

Consumers pay that $24.4m a year whether Whirinaki is running or not. Right now it is going full bore. But it stood idle for 18 months previously.

Caygill said many people believed they should expect to be able to use power when and how they wanted. But a country which relied 60% on hydro-generated electricity had to be careful using electricity in those years when it didn't rain as much.

The commission believed $24.4m a year was a high price to pay for security. More Whirinakis, which would sit idle for most of the year, would be too high a price to pay for increased security.

Caygill said that was a judgement call and could be debated. "This is public business, after all, but I don't think we have got it wrong. If we did build a lot more emergency reserve we would pretty soon be more worried about the cost of power rather than security in dry winter months."

Speaking to the Star-Times from Portland, Oregon, Hemmingway said that debate would be better informed if it was known whether the cost of building more reserve would outweigh the lower peak electricity prices which would theoretically follow.

"I don't know whether that work has yet been done, but it should be."

Matthes said major electricity users were critical of the "knee-jerk reaction" which led to the building of the Whirinaki station in 2003 and was now rebounding on the government and the commission.

Whirinaki, which was running constantly on diesel, the most expensive fuel, was effectively dragging up wholesale prices to $289 per megawatt hour, and waspoorly located, in Napier, where it added to an overburdened transmission network, rather than being closer to either Wellington or Auckland.

If controversy surrounds the commission's role in securing peak demand electricity supply, its other major role as regulator, planner and rule-setter of the electricity system is less in the public eye.
Approving the Cook Strait cable and new transmission lines into Auckland are important commission projects in this regard, said Caygill.

Talk about network transmission, and eyes glaze over. But it is critically important to every New Zealander if power is to get quickly to where it is needed most, he said. Matthes gave the commission a tick in this role.

Regulatory and policy work takes around 40% of the commission's budget, or $31.08m last year. It is work someone would have to do if the commission didn't. It was previously incurred and absorbed by the electricity industry itself during the days of self-regulation. That system ran for 2 1/2 years in the early part of this decade, and at a reported cost of $7m.

Now it is paid for by the commission levy on the industry which the industry passes on, now clearly identified, as a line on consumers' power bills.

When the Electricity Commission was set up in late 2003, then Energy Minister Pete Hodgson was reported to have said annual running costs were expected to be $6m.

Those costs last year totalled $13.5m or 10% of the commission budget, and include employee costs ($5.7m), commissioners' fees ($719,000) and consultant fees ($7.1m).

The fourth major cost is promoting energy efficiency. Last year that absorbed $4.1m.

Besides being the fourth significant dry year in the last seven, 2008 is also election year. So is the commission in for its first shakeup? "I can only observe that it is still a young agency," said Caygill.
"Not only is the commission young, the rules it administers are young, and much of its work has been in ground-laying design," he said. "It is not surprising it should still be trying to find its feet."

So also, it seems, is New Zealand's wholesale electricity market again not without its detractors which is now 10 years old and which the commission has been reviewing. Its report is due out by the end of the year.

Caygill suspects people will be "somewhat underwhelmed" by the findings. "What we are likely to be pointing to are areas where we think we can make progress, rather than start again."

But encouraging greater competition among retailers as a way of getting prices lower is one area of concern, he said.

Matthes would like the commission to be doing more about competition among large generators.
"They talk with each other in a way which in other jurisdictions would be quite anti-competitive," he said. In 2003 retailers had come up with regional schemes to encourage people to save power by giving them discounts on their power bills.

"We have seen none of that this year and you can't help wondering whether there have been discussions behind bike sheds," said Matthes.

Hemmingway told the Star-Times he was always puzzled why residential power prices were so much higher than commercial and industrial prices. The gap was far bigger than in the US.

"I was told by companies it was so expensive to serve residential customers, but what I never found out was how they accounted for residential customer costs."

On security of supply, Caygill said questions surrounding the Whirinaki station were legitimate and needed to be addressed.

The commission would also look at making explicit "capacity payments" to generators to make plants specifically available in times of shortage.

"But let's not kid ourselves. It's the consumers who would ultimately pay for this, and unless they are better off it wouldn't be worth doing."

COMMISSION ACHIEVEMENTS
Development of a grid pricing and investment regime, stopping litigation between industry members on grid charges.
$1.25 billion of grid investment approvals to March 2008.
Auckland transmission line revised for more capacity and higher reliability at lower cost.
Support of more than 3.4 million energy efficient light bulbs, saving about 200GW/h, or $40 million, a year.
Funding of the Whirinaki reserve generator.
New guidelines on advanced meters.
Minimum standards for contracts and processes before consumers can be disconnected for non-payment. Disconnections are almost a tenth of a year ago.
.Source: Electricity Commission.

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ELECTRICITY COMMISSION CALLED TO ACCOUNT