Mercury Submission to the Electricity Price Review Options Paper


22 March 2019 

Electricity Price Review
Energy Markets Team
Ministry for Business, Innovation and Employment

Mercury welcomes the Electricity Price Review (EPR) Options Paper and supports the intent to consider how the world leading performance of New Zealand’s electricity sector can be further enhanced for the long-term benefit of consumers. We thank the Panel for its willingness to engage with stakeholders throughout the process to date.
 
Importantly the Panel has recognised many aspects of the electricity market are working well for consumers and that significant interventions are not an appropriate response in New Zealand. 
 
Mercury supports the view in the Options Paper that there are many factors outside of the electricity sector’s control that contribute to vulnerability and there are already many positive initiatives underway to address this. We agree that a joined-up approach across Government, industry and regulators will deliver the best outcomes.

Collectively the options in the paper aimed at improving the consumer voice and outcomes for vulnerable consumers through better advice and financial support are well targeted and will make a real difference.
 
While Mercury supports the intention to introduce additional financial assistance for energy consumers, we reiterate our view that the best outcome would be to better target the Government’s existing Winter Energy Payment (WEP) rather than introduce additional tax payer funding.

The $374m annually provided to fund the WEP is substantially higher than the $27m publicly reported annually that retail sector incurs for debt write-offs. This suggests the government is significantly overfunding the WEP, much of which benefits wide demographic groups who do not need financial assistance.
 
Mercury previously noted that if the WEP were better targeted to the 100,000 vulnerable households identified by the EPR it would in fact be capable of completely funding the annual electricity bills for those consumers as well as, more importantly, enabling the purchase of more energy efficient appliances for those households. Reforming the WEP to make it more targeted is a major missed opportunity to make the most meaningful and substantial difference to vulnerability in New Zealand.
 
As an overarching comment, many of the options supported by the EPR panel will require additional funding. If predominantly funded via industry levy, the outcome of the review will be to raise prices to consumers in the near term.
 
Mercury welcomes the recognition that as our already strong retail competition continues to expand we must ensure that vulnerable consumers are not left behind. We strongly support the EPR Panel’s proposed option to provide stronger regulation around minimum standards, particularly regarding payment terms.
 
Our analysis indicates that around 33% of retailers (all second tier or new entrants) are restricting payment options to require direct debit or credit card payment only. This approach disadvantages the most vulnerable consumers who live predominantly in a cash economy and may not have access to a bank account or credit card. We agree with the Panel that the new providers of energy services into the future are unlikely to give high priority to voluntary standards and that regulation is required.
 
Mercury continues to support positive incentives and choice for consumers through its position that Prompt Payment Discounts (PPDs) should be made reflective of the costs to retailers rather than banned outright. This was a key recommendation from Australian regulators where such discounts were far higher than those observed in New Zealand.
 
Mercury agrees with the view of the Electricity Authority that the numbers of consumers identified by the EPR Panel as potentially disengaged from the market is likely to be significantly overstated.

Many will have engaged with the market but not found cost savings to be material. Further, intense competition in the New Zealand market has resulted much more in a focus on customer retention, incentivising loyalty through many non-price related rewards schemes and value-added services. Consumers do not need to have changed supplier to experience the benefits of competition.
 
Mercury suggests the Electricity Authority consider the costs and benefits of implementing the Panel’s switching trial proposal as part of its currently funded switching project. A number of commercial switching campaigns have failed to deliver material improvements to switching rates in New Zealand. There may be nearer term options that could better promote consumer awareness.

We note that competition is increasingly coming from areas outside of the traditional electricity sector with significant potential for customer disintermediation. Mercury supports the proposal for retailers to take a more proactive role in promoting existing switching websites in their communications with consumers. 
 
We welcome the Panel’s clear recommendation to repeal the Low Fixed Charge Tariff Regulations (LFCT). We agree these regulations are poorly targeted. Phasing out the LFCT will allow for much more efficient price signals for consumers in the longer term. Removing the excessive variability in distribution network charges will reduce the unnecessarily high winter bills for consumers and make a real difference for the most vulnerable households.

We also support the various measures in the options paper to promote greater energy efficiency and more efficient building standards. This is an area where New Zealand lags internationally and is a direct contributor to higher energy consumption and costs which impacts the most vulnerable consumers disproportionately.
 
Mercury supports the transparency and reporting measures outlined in the paper in terms of improving confidence in the efficient operation of the wholesale electricity markets in New Zealand. We also agree with the Panel’s view that forced separation of generation and retailing would be an excessive response without commensurate benefit and potentially some adverse consequences and that other options outlined in the report should help to address the issues identified.
 
Implementing more sustainable market making arrangements is a priority area for reform. Mercury strongly supports an accelerated push toward a compensated regime that positively incentivises wider participation. In contrast, Mercury considers there are significant risks in imposing mandatory market making requirements which would concentrate unsustainable financial and insolvency risk on a small number of participants and would be likely to be legally challenged.
 
Mercury supports the proposal for increased powers for regulators to tighten and clarify regulatory frameworks that apply to network monopolies in response to emerging technologies. While the Panel and regulators favour a wait-and-see approach, Mercury considers many of the issues around data sharing and competitive market impacts would be resolved by regulators taking a clear view on the boundary between competitive and regulated activities.

As a real example Mercury considers it as indefensible that many network companies consider all consumers in their monopoly areas should pay for public car chargers as part of their regulated asset bases.  
 
In conclusion, Mercury welcomes the options put forward in the report and the opportunity to provide feedback to the Panel to further shape its recommendations.

Mercury is encouraged that with industry, regulators and government working together we can build on the exceptional strengths of New Zealand’s existing market to deliver better and fairer outcomes for consumers over the long term.




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