Good morning Chairman and d. I am delighted to be invited to address this conference this morning. The pace of development of the New Zealand wholesale electricity market is accelerating. It is an exciting time to be part of the electricity industry in New Zealand.
Recent Developments
Since the signing of the memorandum of understanding between the Crown and ECNZ on 8 June last year, the industry has worked very hard to meet the tight deadlines that were set. I congratulate the industry on its efforts. First, in July 1995, Emco took over from ECNZ the role of publishing the market weekly prices. For the first time, an independent party, Emco, became a key information source to the market.

A set of interim market rules was designed and authorised by the commerce commission, in time to allow scheduling of two generators, ECNZ and contact, for the first time in New Zealand history. And that two generator system has operated efficiently since February.

Well in advance of the final market beginning operation, Emco has introduced daily pricing. And I note this occurred on good Friday, when people, including some within the industry, were on holiday, and the pattern of electricity use was unusual. Despite the doomsayers, the lights stayed on. The move to daily pricing should not be underrated. Finally the market is able to begin to respond to signals that have been hidden in the 'black box' of the monopoly supplier. Daily pricing will lead to an increase in opportunities for competition and for the creation of new electricity products to meet customers' needs.

Contact energy has entered the market as a new force to be reckoned with, bringing downward pressure on wholesale prices. I congratulate contact on their approach to electricity marketing. They have listened to customers and designed contracts that respond to customer needs. Client satisfaction is now taken for granted in most New Zealand markets, and it is first class to see that electricity is coming into the fold.

Congratulations also to Wairarapa electricity, who in April became the first energy company to sign a contract with contact. That contract is for five years supply, starting this October. A particularly welcome development has been the high level of private sector interest in new electricity generation projects. Those over 50 mw include the Southdown and Taranaki combined cycle stations, the Tararua wind farm, and the Poihipi and Mokai geothermal initiatives.

As the electricity market approaches the sophistication of the financial markets, I see new faces in the industry, financial advisors, stock brokers, and merchant bankers. The inflow of these skills is welcome, and indications are that the flow will be increasing. The New Zealand futures and options exchange announced in April that they will offer electricity futures and options contracts next quarter. I welcome this announcement. It will provide competition for the ECNZ and contact hedge products, and will help keep Emco on its toes.

You will shortly receive ECNZ's tender documents for New Zealand's first competitive bids for wholesale electricity. Also, some of you will be considering your votes on the design of the final rules for the electricity market. I also understand that Trans Power expects, very soon, to advise its customers about transmission pricing for the new wholesale market, including the availability of five year contracts. Trans Power's pricing proposals are based on the recommendations of the grid services working group, which has laboured hard and long to develop efficient and fair pricing principles in this particularly contentious area.

At this point, the pieces are coming together for establishment of a properly functioning electricity market. I would like to congratulate the industry on rising to the challenges involved.

Government's objectives

With all this change going on it is pertinent to put things in perspective. What are the gains that we expect to see from putting a competitive wholesale electricity market in place in New Zealand? The Government's policy, which market participants took as the starting point for designing the market, is to ensure the continuing availability of energy services at the lowest cost to the economy as a whole, consistent with sustainable development. The method preferred to achieve this is competition, because it results in more efficient production, stronger customer focus, higher value usage, and prices that encourage further supply when needed.

Already some of these benefits are apparent. New generators can have confidence that they will have a properly functioning wholesale electricity market to sell into. The confidence this gives for new investment has freed the tax-payer from subsidising new electricity generation projects, and from taking the risks inherent in those projects. The management of those projects is transferred from the bureaucrats sitting in Wellington to a very diversified set of managers and private investors.

I see some former government planners and engineers lamenting this terrible state of affairs. "No-one will be in control" they say. Therefore no one will build new power stations and the lights will go out, they say. The media, some with fairly transparent agendas, report this nonsense as serious analysis.

A moment's reflection shows it's nonsense. How can people seriously say new power stations won't be built in time in a competitive market when the evidence before their eyes right now is precisely the opposite? We have at least 760mw of new capacity - enough to take care of at least 5 years demand growth - underway right now. Not only that, these are highly efficient and diversified stations with a good mix of fuel sources, including wind, geothermal and gas. And I'll lay money that they come on stream on time and within budget, in stark contrast to the projects of the past when central planners were "in control". As for the lights going out as a result hydro crises in the absence of central planning, how short can people's memories be? It is only four short years ago, when our system was still centrally managed, that we had one of New Zealand's worst hydro crises. Most of you here will recall vividly how the crisis seemed to take those who were meant to be "in control" by surprise despite the increasingly strident warnings of people who were actually looking at whether it was raining and at actual lake levels.

The big difference in our new market-based regime is that those who have the foresight to conclude there is a risk of a water shortage will be able to buy up forward hedges in the contracts trading market against rising spot prices as water gets tight. This will provide powerful price signals well in advance of any shortage. Generators which ignore these signals, and don't manage their lake levels better by cranking up their thermals, will lose a bundle. Similarly, buyers who are unhedged will need to take measures to reduce demand, while buyers who are hedged will have strong incentives to save power and sell surplus hedges at a profit to buyers wanting more hedges.

The signals and incentives to manage hydro shortages better in future will be very powerful because people will have real money at stake. There is no doubt in my mind that there is no chance in future of hydro shortages taking anyone by surprise. If that's the consequence of having "no-one in control" we will be all the better for it.

Safeguards

The government has taken firm steps to ensure that the market functions properly. You will be aware of the restraints that have been placed on ECNZ until its market share falls to 45%. These include a building cap which prevents ECNZ from building more than 50% of new capacity. This ensures that ECNZ's market share must decline over time. In addition ECNZ is required to financially ring-fence any new generation project. This, more than anything, will create a level playing field for new competitors in generation. Because ECNZ will not be able to cross-subsidise its new stations, they will not be able to build a new station before it is viable on its own merits.

Ring-fencing ensures that the market price charged for electricity will reflect the full cost of the resources used to generate that electricity. This, in turn, helps ensure that our national resources are used in the best way, to improve the economy as a whole. The government has also introduced other constraints on ECNZ. The requirement that ECNZ offer, long term contracts is to give purchasers an ability to ensure that ECNZ does not dominate the spot market. In addition, there is a continuing restraint on ECNZ against acquiring ownership interests in local electricity companies.

We welcome the steps by the industry to design the permanent market rules that are to come into force later this year. We consider that the electricity industry is mature enough to design its own rules and codes and to manage itself as an industry. Market participants know the business best and have an interest in seeing it succeed. The rules will contain provisions for self-monitoring by market participants, and I expect the highest standards of conduct to feature, so that consumers are assured of the maximum benefits. Parties on both sides will vote on the rules before they are put in place.

On the Government side, the rules are of course being developed within the framework of New Zealand's general legislation, including the commerce act which is designed to promote fair competition. I understand that the final rules will be subject to commerce commission authorisation. In addition, the Government will look over the rules to ensure that any public policy concerns are met.

Delivering benefits to consumers

The New Zealand electricity industry has the opportunity to be the least regulated electricity industry in the world. However, this freedom is not guaranteed. There are challenges facing the electricity industry at all levels, generation, transmission, distribution and retailing, which could threaten the reforms.

On 12 October, just around the time the new market is scheduled to commence, the first MMP election will be held. Other parties have varying proposals for the energy sector. Different interest groups will challenge the outcomes of the reforms. Industry must bear in mind that the most powerful way of convincing the public is results. The challenge is for the industry to produce those results for consumers - results such as lower prices, secure supply, increased choices, better service, cost cutting, and innovation. I want to see the maximum savings passed on to consumers. Cost increases should, where possible, be absorbed by efficiency gains.

Competition is the key to delivering these results. The Commerce Commission is looking into some use of systems agreements that appear to contain anti-competitive elements. Companies that are not actively promoting competition would do well to consider the longer term consequences of their stance. Consumers expect results, and it is my job to see that they are not disappointed.

I congratulate those dynamic companies such as bay of plenty electricity, energy brokers, Netco, pacific energy and united energy that have fought for and won new customers. I expect to see further developments in competition soon after the wholesale market begins full operation. Retailers will then have access to a diverse range of wholesale products. Improvements in metering technology are imminent - these will enable competition to accelerate.

When the new market opens in October you will have to ask yourselves what your market position is. Do you just deliver kilowatt hours or is there more? I congratulate Mercury and Electra on their tight self-imposed customer service standards, and would expect to see this become a model for the industry. The industry will also have to expand services such as energy audits, energy efficiency advice, shared savings, and tailoring the customer's use to their and your tariff needs. I want to see companies offering customers the opportunity to go on to spot based tariffs for at least some of their load. New combinations of services, such as cable TV or other utility services will emerge. Technological advances will give innovative companies a cutting edge.

Conclusion

There is no doubt that this is an exciting and challenging time for energy companies as they begin to compete head to head. Many of you have worked long hours over the last year to make this new wholesale electricity market a reality. A year from now, I expect the face of the electricity industry to be almost unrecognisable. I challenge you to take the opportunities that this market offers, and to deliver results to your consumers and your shareholders.

Thank you for giving me the opportunity to address your conference today.