New Zealand energy industry divided by legislation - could this happen in your
Up till the early 1990s businesses in the New Zealand energy industry (there were 52 of them) had been owned and managed by politicians, who had every incentive to keep domestic tariffs low and industrial tariffs high. The logic was that domestic customers had a vote, while business did not. Unfortunately this made export industries weak and stifled growth in employment.
So the government mandated the appointment of the first independent commercial directors of these 52 power companies. Very quickly commercial decisions were taken, and we saw sound amalgamations and mergers, while tariffs were also restructured. Domestic rates were increased by as much as 30%, with similar reductions in the case of businesses.
By 1996 there were fewer than 40 companies in operation. Little else seemed to have changed from the domestic consumer’s perspective, however – he believed he was faced with continued price increases, while harbouring a suspicion that he should be getting a better deal from these monopolistic energy supply businesses.
This was not accurate; a tremendous amount had changed in the industry over that six year period. At Southpower, for example, we were operating with a third of the staff we had had in 1990, yet we were still able to manage the 35% customer churn and 3% growth rate with significantly better customer service. The culture had been turned around from "Wait in line!" to "How may I help you?". We had assisted over 10% of our customers to adopt new technology solutions that allowed them to budget their energy, to have access to instant information in dollars and cents, and even to pay electronically direct from their own bank account to ours. (Our market research had shown that these were some of the innovations customers really wanted.)
THE POLITICIANS BECOME INVOLVED
However, the impression the politicians had was that there was a fortress mentality in the energy industry. They believed there were too many regional companies duplicating efforts, and that prices were unlikely to fall because there was no customer competition at the retail end of the market. Further radical change was on the cards.
Along came a new Minister of Energy, ready to dust off the legislative officials and sort the industry out!
Our politicians got behind the popular view that New Zealand domestic energy customers were being exploited by the uncaring, profit driven, monopolistic protected entities in the market! Energy companies, the politicians were led to believe, were giving no thought to how costs could be reduced or how innovation and technology changes could be applied to the industry to strip away the significant barriers to entry.
This was not accurate either. A small number of innovative energy companies had been working on solutions to allow the industry to bring choice of supply to New Zealand’s 1.6 million customer base. Ultimately, however, it became too hard to galvanise others in the industry to support these initiatives. Have you ever tried to work through 37 different agendas, not to mention getting 30 CEOs to agree on anything? A gargantuan task, not made any easier by the dominant size and muscle of certain players, who were paranoid about losing their god-given right to control access to "their" customers!
To give the politicians their due, they did initially try to move the industry to a higher level of open competition. However, the less enlightened power companies misread the signals and tried to derail the process through a range of activities, including intimidation, lobbying, logic, negative advertising, scare tactics and a doomsday approach – at one point even citing the Magna Carta of 1215 AD as a defence!
However, a small number of companies (including ourselves) have persevered in attempting to offer 2000 customers a choice of supply through a process of ‘dynamic profiling’. In addition 500 domestic customers nationally were offered the opportunity to trial electronic choice of supply as one of the services of our home services platform (ORCA) trial earlier this year.
Through a subsidiary company, CIC Systems Ltd, we have also been instrumental in assisting a number of smaller New Zealand power companies to develop innovative payment systems using our technology and kiosks. Some are even using paging technology that enables utilities to offer $1 weekend specials to an ever increasing customer base!
With this as a background, we were disappointed – but not totally surprised – when the government announced its latest bombshell.
An industry in two distinct parts
In June 1998 a range of statutes passed into law, among them the separation of the energy industry into two distinct parts – one that owns and operates the poles and wires infrastructure (network); and one that owns and operates generation and the retail customer interface (retailer).
In addition a low cost switching methodology will be introduced by April 1999, allowing total domestic competition to start (probably dynamic profiling at GXP). And ECNZ, the government-owned generation company, will split into three competing companies by April 1999, with privatisation likely some time thereafter.
You can imagine the opposition from some in the industry who have for years championed the drive towards self-sufficiency, with a vision of a vertically integrated monopoly using an avoided cost mentality and spreading the investment risks across the total business. They are now being told to manage the parts as separate stand-alone businesses under the mantle of competition, and that bad investment (generation) decisions can not be underpinned by a captured customer base. (Sounds similar to the US stranded asset debate).
Worse was yet to come for the beleaguered industry. Not only was separation mandatory and at arms length (no common management or directors) but ownership had to be divested within a very short time. In essence no-one can own or invest in both sides of the business. You can own a network but you must divest to no more than a maximum of 10% in a retailer (generator) – or you can own a retailer (generator) outright, but you cannot own a network.
If you’re thinking this could only happen in a small island somewhere in the Pacific, think again! What is being done in New Zealand is being studied with great interest around the world. In the United Kingdom, OFFER is suggesting that the only long term solution is a radical lobotomy between networks and retailing. Ireland, Australia and even some states in America are looking at the experiment with growing enthusiasm.
For politicians it is a solution with great vote catching appeal. And it’s hard to counter from inside the existing energy industry, which has a vested interest in continuing to put up barriers to entry. Fighting it in the public arena will prove damaging, whether you win or lose.
Politicians are not stupid. On this occasion they out-manoeuvred an electricity industry that was unable collectively to put together a realistic solution to offer customers one thing – a choice of supply.
Energy markets must change. The old geographical franchise model has served its time and needs to be junked. Call centres, knowledge centres and skill sets can be located anywhere in the world. Technology and innovation can be unleashed, which will help customers reduce their energy costs and allow them to choose their supply from anyone, anywhere, whose service suits their needs.
Pricing and competition will see energy become a pure commodity sooner than we expect, and margins will not be able to support the infrastructure costs currently charged to them. Customers willing to make changes will benefit directly, with significant reductions in prices the reward for changing the way they purchase or use energy.
There is no point in discussing minor incremental changes to the industry. The survivors will be those companies smart enough to see that radical step changes are needed, and to implement them. Why, for instance, should energy be billed historically, with all the downstream complications and costs? Why is it not paid for like petrol or groceries – up front?
I hope this has added to your understanding of New Zealand’s energy position and where it seems to be heading. Maybe you see your country or your company as different or unique. You may be right – but what if you are wrong and your politicians are also looking at the New Zealand experiment?