Transcript: The Bradford Reforms - 25 Years On - Consume This podcast

Jon Duffy: The year is 1888. The place it's Reefton which if you don't know is a small town on the West coast. The people of Reefton, they're about to experience a major change in their lives. For years, they've relied on candles and kerosene lamps for lighting, the flickering glow, casting of feeble shadow upon the streets. But now there's a new technology about to come to town, electricity.

The man responsible for bringing electricity to Reefton is a chap by the name of Walter Prince. Prince is an engineer from England who came to Aotearoa in the 1880s. He's passionate about the potential of electricity and he believes it will transform our lives.

Prince convinces the good people of Reefton to build a hydroelectric power station. The power station is built on the Inangahua River, and it begins generating electricity in August, 1888. The arrival of electricity in Reefton is a major event.

For the first time people have a reliable source of light at night. They can also use electricity to power their appliances, such as sewing machines and washing machines. It makes their lives easier and more comfortable. It also opens up new possibilities for the future.

And with that hydro plant, Reefton becomes the first place in the country with a public power supply. It led the pack, but Reefton was ultimately just one of many towns that got electricity in the late 19th century. Electricity helped to modernise New Zealand and it made us a more prosperous country. It also helped to improve the quality of life for all New Zealanders. Today, we take it for granted, but it's important to remember that it wasn't always this way. The establishment of electricity in New Zealand was a major achievement.

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Jon Duffy: Welcome to Consume This with me, Jon Duffy. On this high voltage episode, we are illuminating our electricity system. Specifically, we're looking back at the electricity industry reform act 1998, or as it's sometimes knows after the minister at the time, Max Bradford - the Bradford Reforms.

Whenever we discuss the Bradford reforms, we are referring to that legislation and its colossal flow on effects effects, which as we'll discover, polarised the nation, had a seismic effect on the way you buy your power, and of course, how much you're charged for it.

As the Bradford reforms celebrate their 25th anniversary, it's time for us to take stock and unpick what those impacts are.

We ask whether the reforms have delivered on their promises, and as we increasingly rely on electricity to power our economy and dig us out of our climate change hole, what needs to happen now for the next 25 years?

Throughout this episode, we'll hear from the political players behind the Bradford Reforms, people like the eponymous Max Bradford.

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Max Bradford: I've always been pretty upset, frankly, about having my name attached to them because they were the last stage of a really major overhaul of the electricity system. But I got stuck with the last and most controversial stage.

Jon Duffy: Former Prime Minister Dame Jenny Shipley.

Dame Jenny Shipley: New Zealand had 17 years where we were spending more than we earned as a nation, and we'd racked up a debt of over 50% of GDP. You don't sit there and do nothing when you are in those circumstances.

Jon Duffy: Economist and electricity enthusiast Geoff Bertram.

Geoff Bertram: And the Bradford Reforms locked in the development of a cartel. It was all driven by the ideological imperatives rather than common sense. And the economics underlying the process were, in my view wrong.

Jon Duffy: As well as the people working on the ground tasked with actually implementing the reforms. Industry consultant Dave Reeve. David Reeve: We can't do switching on this scale. We can't keep track of the meter. We can't keep track of the customers. I mean, the industry was a disaster. We actually couldn't do it.

Jon Duffy: And Steve Batstone.

Steve Batstone: So to go into the reforms and say, we're gonna do this and prices are gonna come down, was bold. And I would say probably a bit naive.

Jon Duffy: Before I started working at Consumer NZ I really didn't spend a lot of time thinking about our electricity system. Like most people, I turn on the lights or plug something in, and that's about it. I expect the system to work and I don't think too much about it. At least until the bill arrives, I imagine you might be the same.

So I want to introduce someone who spends a lot, and I mean a lot more time thinking about it, dreaming about it, muttering about it in his sleep. My colleague, and the person I most want to see wrestle a pony... electricity savant and the real brains behind this story, Powerswitch manager, Paul Fuge.

Paul Fuge: Kia ora.

Jon Duffy: So a natural first question, Paul, what exactly is electricity?

Paul Fuge: It's the lifeblood of the nation.

(Laughter)

Jon Duffy: And a subsidiary question. What exactly are the Bradford reforms?

Paul Fuge: So the first key point here with the Bradford reforms is they're not what people think they are. It's become shorthand in a lot of people's minds for sort of general electricity reforms.

And the key point here is that as Max alluded to, they're actually just a final stage and a whole lot of reforms.

Dame Jenny Shipley: So you are talking about the mid eighties through to the end of the nineties I think can probably be described as the reform period. Of which each government delivered particular elements and the chunk of the whole economy that the government dominated over that time diminished, and energy was just one of many.

Because we were trying to achieve a lot of things, the growth in the energy supply, getting some money coming in from not out of taxpayers pockets, but rather the market itself. So it's completely incorrect to elevate the energy sector as if it was something special or isolated. This was a transformational period in the way in which New Zealand delivered government in order for the economy to grow larger.

Max Bradford: Well, my focus as the Minister of Energy was really on what did we need to do to finish the reform process that had started in the mid eighties. Basically to separate the monopoly parts of the system from the potentially competitive parts. Successive governments really wanted to introduce competition to give people choice, and that's what the reforms that were associated with me did.

Paul Fuge: And that point on separating the competitive versus monopoly parts of the system is really the crux of the Bradford reforms. Reforms that at their core were all about competition. To understand what that means, you need to know how the industry worked prior to reform.

Jon Duffy: I bet you're gonna talk about power pylons aren't you, Paul?

Paul Fuge: Well, I'd love to talk about electricity pylons as most people would, but I haven't got time today. So yeah, almost all of our electricity was generated by the government owned Electricity Corporation of New Zealand, AKA ECNZ. Now they also moved that power around the country by the high voltage transmission network. That's the National Grid.

Local electricity supply associations bought that electricity from ECNZ and transported it from the National Grid into our homes and businesses. They also sold it to us. So you didn't have a choice who you bought your power from. It was determined by where you lived and which ESA owned the local lines. In Wellington, that would've been Capital Power, although I guess if you really hated your local supplier, you could technically move to a different city...

Jon Duffy: It'd be quite an extreme thing to do though, wouldn't it?

Paul Fuge: Yeah, I guess it would.

(Laughter)

Paul Fuge: So that system, that's the local transmission system and the local distribution system that bring the power into our homes. They're what you call natural monopolies. It doesn't really make sense for rival companies to duplicate all the power lines around the country. That would be stupid

Jon Duffy: madness

Paul Fuge: and that was as clear 25 years ago as it is now.

So everything else in the system, that's the electricity generation and retail was seen as potentially competitive. And the goal of the Bradford reforms was to create that competition.

Max Bradford: Really ever since the end of the war, the economic theory had been developing to show that where you had competition, prices generally would fall. If you looked at the statistics over a period of time, it was clear that New Zealanders were paying a hell of a lot more for their electricity than they needed to.

Anybody who's done economics knows that, uh, you, you create a monopoly and it doesn't matter who owns it, whether it's government or privately owned, uh, will tend to maximize profits much more than the competitive sector would. And that's why the notion of competitive markets, wherever they might be, aviation, telecommunications, banking, you name it, uh, why that's so entrenched in people's attitudes.

They want choice. They want the ability to say, I don't want to pay that price for this product which I can buy from down the road from another supplier at a cheaper rate.

Dame Jenny Shipley: Competition is a means to an end. Competition in its own right is lacking in merit. The evidence was that if you have multiple players, you will have a different outcome than if you have a monopoly player.

Remember, at the very beginning, the monopolies were needing the support of taxpayers. What our objective was, was to get a much better balance so there'd be new investment and the pressures to keep prices down.

Paul Fuge: And as we can hear in this clip of a much younger Max Bradford talking to RNZ in 1998...

Max Bradford: I have little doubt at all that prices will come down for consumers as a result of the reform.

Paul Fuge: He was clearly, very confident that the reforms would lower prices, but it did come with a caveat.

Max Bradford: The decisions as to what prices will be charged will be in the hands of the power companies, not in the hands of the government.

Paul Fuge: At the time this was a shift in thinking. Today, the theory of competition is so ingrained in our lives that we tend to treat it as the default setting and apply it to almost everything, but that wasn't always the case. And there are well-respected economists, people like Jeff Bertram, who still have different ideas.

Geoff Bertram: It certainly isn't true that natural monopoly has to mean price gouging, profiteering. It can perfectly well be done a different way. That's all to do with firstly, the philosophy, the way in which the institutions are set up.

It was a state owned operation that was a social service. Its job was to get the electricity cheaply to households to enable them to maintain a standard of living. It was clear that the proposals that were coming forward were liable to raise prices, not lower them.

Jon Duffy: You know, that's such an interesting point that Geoff makes, because the whole idea that a monopoly could be philosophically against maximising profits is certainly not the narrative that we were...

I mean, you'd remember the eighties a lot better than me Paul, but through the eighties and nineties, that's not what we were sold as a narrative.

Paul Fuge: Yeah. So the reform period was an interesting time, jon. You know, it was a time of significant and rapid change. Much of it quite controversial, but it was in response to the political realities of the day.

Then Prime Minister Jenny Shipley is very clear that these had a significant impact on her government's decisions.

Dame Jenny Shipley: That context is very important. I mean, we had simply got away with supplying Britain. They effectively paid us and we lived happily ever after. They booted us out of the nest when they joined the EU, and a whole lot of things became a realization. We weren't earning enough. We got into debt as a nation, heavily into debt. The World Bank was over our shoulder, and you don't sit there and do nothing.

Paul Fuge: So that was the thinking driving the government's decision making leading up to the Bradford reforms.

Jon Duffy: Right. Okay.

Paul Fuge: The reforms themselves were really two separate but related steps. The first was arguably the least controversial - to introduce competition into generation. They did this by splitting the state owned ECNZ into three new companies, Genesis, Meridian, and Mighty River Power, which you'll now know as Mercury.

Jon Duffy: What about Contact?

Paul Fuge: Yeah, so that's interesting about Contact. They were already spun out of ECNZ prior to this.

Jon Duffy: Right okay.

Paul Fuge: So the thinking was competition would put pressure on the power stations incentivising them to become more efficient and win more customers. This they believed would increase investment in the sector and ultimately decrease our power prices.

Max Bradford: At the time I was involved in this we had the advantage of looking around the rest of the world where a number of countries were introducing competitive markets, and it showed that prices could fall.

Dame Jenny Shipley: So if you ask about why we were doing this, it was very clear that as we gave people clear signals that if they invested their capital, human capital and financial capital, they could be sure of the rules and they'd be rewarded.

David Reeve: My personal opinion, even though I was at ECNZ at the time, was that the breakup of ECNZ actually probably... well, no, I'll go further than that was a sensible idea and it did improve competitive outcomes in the market.

Paul Fuge: After leaving politics, Jenny Shipley went on to become chair of Genesis Energy, where she also claims to have seen this play out.

Dame Jenny Shipley: I have sat at the board table and been in many situations and with Genesis, where you literally look at what the cost structure's gone up over the year and what price you think the market can bear. We have held prices. You know, different companies make rational market decisions about whether they'll pass on costs or whether they'll hold because of the competition in the market.

It's not true that there's just a, oh, let's pass on costs. You want to hold your customers.

Paul Fuge: Hold your customers is a very specific phrase to use here, not grow or increase hold.

Geoff Bertram: Under a market system the returns in New Zealand come from consolidating a market share and then exploiting it ruthlessly. They do not come from expanding market share, and that kills competition. The incentive to compete is completely gone.

Paul Fuge: So according to Geoff the generators aren't actually trying to win new customers from each other. And without that competition, there isn't any more pressure on prices than in a monopoly system. In fact, he believes the loss of cross subsidisation between power stations actually increased the price of electricity.

Geoff Bertram: If you were looking to be an independent generator coming into a market to generate, say, oil fired, or coal fired, or gas fired, or wind, any of those things, you would be having an entry price that would be above the price at which New Zealand electricity division was supplying electricity. Okay. In other words, no new generator in the 1980s could offer a cheaper wholesale product than NZED could produce with its integrated bundle of generating stations. Cheap hydro there, expensive oil over there, gas and coal in the middle.

They mixed it all together. They averaged the costs. They charged you the uh, price that covered all the costs. And of course, that price was below what any new entrant generator could meet. People who were ideologically determined to have competing generation thought how do we deal with this? Well, we've gotta force the wholesale price up until it's efficient for people to come in.

That's the neoliberal position. It's poisonous for consumers. Yes. It's nice to have competition where it works, where it delivers. It's not nice to have competition where it, it leads to government forcing the, your existing supplier to raise their prices to enable the newcomers to make a profit. That's nuts.

Paul Fuge: Look, there are undeniably some issues with the wholesale market, that's how our retailers buy electricity from the generators. Now, these market issues are quite technical and we can't really get into them here. But overall, everyone we spoke to while researching this agreed that generation could be competitive. Even Geoff. Their differences lie in whether they believe that competition has been realised.

There have been some new entrants, but the generation business is still dominated by the four players that were spun out of ECNZ 25 years ago.

Jon Duffy: So Paul, you used to work at ECNZ, didn't you?

Paul Fuge: I did. In fact, I was actually one of the first people to me be made redundant in the first wave of reforms in the mid eighties, and I just never left.

Jon Duffy: Oh, that's right. You've told me this story. You just kept turning up to work.

Paul Fuge: Yeah.

Jon Duffy: And they kept paying you.

Paul Fuge: Yeah.

Jon Duffy: You're not still being paid, are you?

Paul Fuge: Well, that was the funny thing. Like, um, I think like, cause I, because I was so young, that was my first job outta school. I don't know how the world worked. And I got this letter that said, oh, thanks, your application for this job you've been unsuccessful. And I said to my boss, what, what's this all about? And he goes I'll just throw it in the bin and see what happens. So I did and they just kept paying me.

And then I was, I was working at the power station like ages later, like months later. And, um, the foreman comes up to me, goes, so who, who are you? And I was like, I'm Paul, and he goes, oh, who do you work for? And I was like, oh, for the electricity. He goes, oh, because I've been on the phone all morning and no one's heard of you.

So I said, oh yeah, I'm going off to a block course and blah, blah, blah. And he's like, you can't just keep turning up.

(Laughter)

Paul Fuge: Like I said, well, I am. And I just kept turning up. that just how I kept my job. Yeah.

(Laughter)

Paul Fuge: Because they got rid of so many people so quickly. I just think they got rid of the people who got rid of the people. Who got rid of the people. So if you just can keep your head down.

Jon Duffy: So, so what you're saying is

Paul Fuge: it was a crazy time. It was crazy.

Jon Duffy: these reforms were really well thought through and, and clinically executed.

Paul Fuge: They were implemented under a lot of haste. And they didn't have the systems to do it like we do now. They just got rid of so many people so quickly and made such a transformational change so quickly, you can't sort of underestimate how, at the time, um, how radical and, and how disruptive it was.

And it was interesting cause it was a whole philosophy because, you know, a lot of the reforms were around, we've been talking about markets and um, you know, being more profitable, but they were never set up as a business. They were set up as a public service. You know, when they built the electricity system, it was all about providing energy to the people and providing power to the people. It was all about, you know, for the economy.

It was never really set up as a proper business as such. And so it was kind of unfair to say, well, these things aren't, Profitable or they're not performance driven or whatever it is.

Jon Duffy: So this kind of buys into Geoff Bertrams argument around monopolies?

Paul Fuge: Yeah. I mean, that was the unfairness. It was never, they were never expected to be that way.

They were set up as a public service, and very much the people who worked there, where a lot of engineers and that sort of thing. And, and the ethos was around doing this for the country and building a great power system and for the benefit of New Zealand.

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Jon Duffy: All right, so Paul at the beginning you mentioned there were two parts to this story. That's the first part.

Paul Fuge: Yeah, and obviously there's some real depth of feeling about that, but it's the second part where things get even more controversial.

David Reeve: It always felt like there wasn't as strong justification for that split as there was for the split of ECNZ.

Max Bradford: And I knew it was gonna be contentious.

Geoff Bertram: Ultimately, the neoliberal project is to shrink the state and remove it from large areas of activity where the market is to prevail.

Dame Jenny Shipley: It wasn't a broader macroeconomic debate. It was very much a local community, and many of the members of parliament felt keenly about that.

David Reeve: The most polarizing aspect was the split of lines and energy companies. A lot of people hated it.

Max Bradford: I don't think any of us in the national government expected there would be such a howl of outrage from a lot of our own supporters.

Jon Duffy: Okay. We know that the Bradford reforms were all about trying to introduce competition to the market. That doesn't seem particularly contentious. So what was the second part?

Paul Fuge: Well, remember earlier when we talked about the local electricity supply authorities?

Jon Duffy: Yep. So they're the guys who run the distribution lines and the retail that took place on those lines.

Paul Fuge: Right, exactly. Well, the second stage of the Bradford reforms was to separate those two functions. The point was to allow us to choose any electricity retailer rather than being forced to buy from the local ESA. For that to work the new retailers needed access to the local power lines. Now, the way they decided to do that was by essentially forcing lines companies to sell their retail division.

Jon Duffy: Okay. Well, a forced asset sale, I can uh, I can see how that would be contentious.

Paul Fuge: Yeah. Lots of people were really upset about this. That's because the ESAs were local, community owned, and often democratic. Communities had a strong sense of involvement in local pride in their ESA. The ownership split caused a lot of hard feelings at the local level.

Max Bradford: But it wasn't an ideological issue as many people have asserted.

The changes that we put in place and which I shepherded through were very well researched. Very well tested in the marketplace as best we could, and very well tested against overseas experience. The political pitch that we decided to adopt was the one which I personally felt was the most important, and that was to give consumers the ability to choose who provided them with electricity.

Paul Fuge: Essentially, they believe that by enabling retail competition, that is letting you choose your supplier, you could shop around to get a better deal, and that is how it works now. If you don't like the prices or the service you're getting from your electricity supplier, You can have a look on Powerswitch and swap to one of over 30 other retailers.

But despite all these options, many of which are cheaper, most of us remain with one of the four large gentailers or their subsidiaries. Jon Duffy: Yeah. Well, I know that I am.

Paul Fuge: Right. And this brings us to another important point. When ECNZ was split up, there was serious debate about whether the new generation companies should also be allowed to get involved in retail. That is selling new power rather than just generating it.

Dame Jenny Shipley: There was a discussion as to whether the gentailers should be generators and retailers, but on balance we decided that we would leave them able to be run.

Max Bradford: The one advantage of having integration between the generators and the retailers is that they can manage the vagaries of coping with supply shortages, demand shortages much better than an individual retailer like Electric Kiwi or some of these other outfits.

Dame Jenny Shipley: i know that there's debate about whether it's fair or not, and I notice small players arguing that it should be broken up, but they should have thought about that when they set up their business model.

Paul Fuge: And so that's what happened. The decision was made to allow the gentailers to form. They instantly became the largest players in our electricity system, and they still are. And that's actually where the word gentailer comes from. It's a matchup of the words generator and retailer. Now that decision is still very contentious in electricity circles.

Jon Duffy: And you know, those are circles where contention reigns...

So what's retail competition got to do with splitting up the electricity supply authorities? Couldn't they just open up their lines to any retailer and still have their own separate retail offering?

Paul Fuge: Well, they could, and in fact, at the time, that's exactly what they argued for. But the government was concerned.

The ESAs owned the distribution lines and had their own retail, so in theory, they could make it impossible for others to compete.

Jon Duffy: Why?

Paul Fuge: Well, the theory was that they could make their retail businesses look far cheaper than they were by loading all administration costs onto the lines instead. That would make switching to any other retailer seem really uncompetitive.

But not everyone shared this concern.

Geoff Bertram: I mean, the first big mistake was to think that local electricity authorities threatened to become dominant monopolists at the expense of consumers. That was stupid. For most of the period of New Zealand's history that we've had in the electricity system it has been socially focused, run by people with a public interest objective, with a mandate to serve, to provide a social service, essentially, and they've delivered very well on that mandate.

Jon Duffy: So essentially Geoff's viewpoint is that motivation is important. From his perspective the idea of monopoly suppliers would always cost more than competitive ones was unfounded. He believes that it depends more on the motivations of an organisation, and an organisation can be motivated by public benefit. I guess, as long as it still covers its costs and earns enough to invest in the future.

Paul Fuge: Yeah, that's basically it. Although electricity industry consultant Dave Reeve told us a different story. He was working at Waipa Networks during this part of the reform period where he was tasked with calculating the line charges for some of their large customers.

David Reeve: There was no regulation about that. I was given no guidance on how to do the calculations. I mean, I wasn't told to try and make it look one way or the other. I was asked to do those calculations, then it went somewhere else and someone had to decide how you allocated things like administration costs. And later on it became obvious that the lines charges got loaded up with all those costs to make the energy businesses look more competitive than they actually were, which is why nobody could compete.

Jon Duffy: So I guess that does sound like a legitimate concern.

Paul Fuge: Well, yes, but the ownership split in forced sales were considered by many to be the extreme solution. Lots of people, including the ESAs, and weirdly the stock exchange believed regulating the businesses to provide equitable access to their distribution lines would've been enough.

This was the option favored by ESA President Doug Matheson. Here he is speaking on RNZ at that time.

RNZ Reporter: The line company would have to let competitors have access at the same price, and if it didn't,

Doug Matheson: anyone who is denied access can complain to the Commerce Commission, who will investigate it, and we are proposing they have the power to split them up.

Paul Fuge: And there was a strong argument to be made here. Rather than forcing the split a lighter touch approach would've been to regulate equal access. And after all the new lines, business was still natural monopolies. They still needed regulation and price control irrespective of who owned them. This was something Max was keenly aware of.

Max Bradford: One of the recommendations I made very strongly to the cabinet, which by and large accepted it was that we had to put a form of price control on the monopoly parts of the system. In those days, it was called CPI plus X. What that reflected was the fact that the monopoly parts of the systems, for the most part still had a lot of fat in them, and that fat could gradually be squeezed out over time by the decisions that they would make about pricing.

Left in the monopoly position they would simply increase the prices on a cost plus basis as used to happen. Unfortunately, the Labor Party at the time we were putting the reforms through the house fought these price control parts of the system very savagely. So in fact, the reformed package that I put up, part of it didn't go in full, you know, into law and into the practice in its totality.

So they made things very difficult in the early years after the reforms were put in to ensure that there was proper control over the monopoly parts of the system.

Paul Fuge: The lines businesses are now regulated by the Commerce Commission.

Geoff Bertram: It's a classic case of industry capture of a regulatory process. The industry was effectively able to dictate the terms in which it was gonna be so-called regulated, and then used the regulators as a shield against both potential competitors and against public outrage at the way prices went up.

I mean, the Commerce Commission is bending over backwards at the moment to protect the enormously overstated asset values of lines companies in New Zealand by allowing them accelerated depreciation, for example, which means consumers can be forced to pay two or three times over for the cost of the assets in order to enable the companies to write them down without losing a cent of revenue.

It's insane.

Jon Duffy: So it's fairly obvious there are legitimate gripes with how the lines companies have been regulated Paul.

Paul Fuge: Well, that's true, and I think that could be a subject for a whole podcast in itself.

The other concern some people had at the time, and this one is a bit of a political issue, is that lines businesses were subsidising residential homes at the expense of industrial and commercial users.

Now, the Commerce Commission came out and told them they had to stop doing that. And this forced them to raise prices for residential households like you and I. I say this is a political issue because whether you think the subsidy was positive or negative kind of comes down to your own worldview, but for Max it was negative.

Max Bradford: You had a supposedly democratic organisation making decisions which benefited consumers. They were making prices for household consumers cheaper than the true cost of supplying electricity to them because they were the voters who put the people into the ESAs. They were being heavily cross subsidised by farm users, by commercial users, and by, uh, industrial users.

That was shown very clearly in the early stages of the readjustment of prices so that people paid much closer to what the true cost of electricity was. People should pay, you know, pretty much what it costs to provide them with such and such service. Now, that's not a popular theory for a lot of people, but um, it meant that because there was heavy cross-subsidisation to households New Zealand industries weren't competitive overseas.

It made a huge difference to the effectiveness and, and the competitiveness of, uh, New Zealand industry.

Jon Duffy: Okay, so basically whatever you think about the unwinding of cross subsidies and the more technical aspects of the reforms, essentially what they did was

One - split ECNZ up into competing generators, and two - separate the wires that deliver our power from the companies that sell it to us, creating competing retailers.

Paul Fuge: Yep. That's basically it Jon. And the third thing they did was they also laid the groundwork and the systems that let us choose and be able to switch between energy retailers.

Jon Duffy: Right. So throughout this we've heard about competition, lowering prices and improving efficiency, all that good stuff. Other than letting me decide who sends it to me what impacts have the reforms actually had on my power bill.

Paul Fuge: Well, unfortunately, they probably haven't done either of those things. Data from Stats NZ is very clear. The industry's productivity is lower now than it was in the nineties.

Jon Duffy: Really? Okay, so that's a cross in the box for efficiency. What about lower prices?

Paul Fuge: Well, as Max says...

Max Bradford: Depends what sort of consumer you were.

Paul Fuge: Look, there's no question that prices are higher. I've done a bit of quick maths and after stripping out things like the GST increase, new environmental charges, things like that, residential power is around 35% higher than it was in 1998. Now, to be fair, industrial users have seen similar price rises, although they're still paying significantly less than households.

But on the flip side, if you're a commercial customer, you're actually paying slightly less than you were in 1998. In real terms, that is.

Jon Duffy: So does this mean the reforms on the whole have raised the price of electricity and shifted the cost burden from industry to consumers like you and me?

Paul Fuge: Well, Jon that's a hard judgment to make.

Although prices are definitely higher for us as residential customers. It's very difficult to say what would've happened without the reform, but certainly Max and Jenny look back on them as a success.

Dame Jenny Shipley: Heaven knows what New Zealand would be like today had they not been done.

Max Bradford: I would argue that not only is the consumer getting lower electricity prices than would otherwise occur if there was a monopoly. The central government's also getting a dividend stream, which they can then use to put into the programs that they determine are important. Whether that be social welfare or defense or whatever.

Dame Jenny Shipley: I think the Bradford reforms have been unfairly maligned, and Max for a period of time was personally unfairly maligned.

But it takes courage and character to do some of these big leadership projects, and Max had that in bucket loads, as did the other ministers who sat round this table and diligently unpicked the complexity of what we faced. I think it was a gift to New Zealand, which only over time. Will be realised. And every time I've seen a government come in and say they're going to review the electricity sector only to proceed, to do nothing, I think it's an endorsement of, uh, the reforms that Max as minister along with the team led.

Jon Duffy: So how about our economist friend, Geoff Bertram? What's his perspective on it?

Paul Fuge: Well, unsurprisingly, it's somewhat different to Jenny and Max's, but. He does believe it could have been different.

Geoff Bertram: If you do look at the detail of the data, it's worth looking at the price track for residential electricity supply from 98 through to 2002.

And what you find looking at those numbers is that in the two years after the Bradford reforms, prices came down, right? And they came down precisely because there was a period of uncertainty when players in the industry could not be certain that competition wouldn't break out. And they couldn't be certain that regulation wouldn't suddenly become effective. All right.

By 2002, it was clear to all the big players in the industry, first, that competition wasn't gonna break out cuz they had nailed it. They'd successfully bought up all the retail customers. They trialed the process of breaking an independent retailer when they drove On Energy out in 2001 by withholding hedge contracts.

Having watched that process play out, the industry knew that anti-competitive practices were gonna work a charm and they were gonna be tolerated. The regulation wasn't coming either. And so by 2002, the industry was relaxing, and from there on, you just see the price rises year after year after year, the price goes up.

Jon Duffy: Okay, Paul, let's pull all of this together. So what are we to think? Have the reforms actually worked for New Zealanders?

Paul Fuge: Look, it's really hard to tell because lots of things have happened since the reforms, right?

Jon Duffy: Yeah.

Paul Fuge: So it's hard to look back and go, well, the reforms promised lower prices and prices are higher. Therefore, the reforms were a failure. Because lots of things have happened in the last 25 years that would've happened anyway, right uh, that put pressure on power prices.

So for example, we bought lots of new power stations. We invested billions of dollars into the national grid. These are good investments. We ended up with a much more renewable power system. It's much more reliable. These, these are good investments, but they did put pressure on power prices. So it's hard to look back and conclude that the reforms were a success or a failure based on the price of electricity.

Jon Duffy: Right. But what about how successful retail competition is? Has competition itself delivered the outcomes we were promised?

Paul Fuge: Again, it's hard to know. It's certainly true we have a lot more retail brands. We have around 30 retail brands today. You know, back in 2003, 2004, we had around nine. So there's certainly lots more choice, but it's a choice that people aren't particularly excited about, and we see that through low switching rates.

People, you know, don't seem that excited about electricity, retail. They're not switching in the numbers you think they would. So for a lot of people it's not a choice that they particularly welcome or are excited by.

But has competition kept a lid on prices? Again, it's hard to tell. There's an argument that says that the prices could have been even higher without electricity retail, right?

Jon Duffy: So conclusion, too hard to tell?

Paul Fuge: It is too hard to tell, but it's also a bit of a, a pointless exercise to sort of speculate of what would've happened had we not had the reforms. The fact is we did, and we are where we are, so we can't turn the clock back and go back to how things were. We just, it just can't happen. So the best thing we can do is just make the best of it.

So we think you know that for all its failings, there's a lot of potential for consumers in in electricity retail. But it hasn't been realised yet. But it could be. So just because people think electricity retail hasn't delivered for consumers in the past, doesn't mean it can't deliver for consumers in the future.

Jon Duffy: So what will make it deliver?

Paul Fuge: So, there's a few things that can happen. One of the problems with electricity retail is structural. You know, you've got these large gentailers that dominate the market, and because they own the power stations, the generation part of the business, and they also have retail it's made it really hard for independent retailers to compete. So you combine that with general consumer apathy, it's made it really hard for electricity retail to develop in the way that it was envisaged in their reforms. We never really got the electricity retail as it was imagined because of that kind of structural flaw. And there were reasons for it I won't get into here they're, they're quite complex. It's probably time to revisit that. It may be an opportunity now to have a new series of reforms.

Jon Duffy: Mm. What do you think the future holds?

Paul Fuge: Well, I believe we're starting to see some glimmers of positive change. I mean, what we're seeing now, It's really exciting because we are seeing technology evolve like solar, batteries, EVs, smart meters are all coming together and I believe these are gonna offer some real choice for consumers going forward.

So I'm quite excited about the future and the future of electricity retail and I believe it's going to head in a direction that was always envisaged, of offering consumers some real choice. You know, my belief is, and I'm excited about this, is that we'll continue to see evolution of electricity, retail, and I believe that evolution is gonna be positive for consumers.

Jon Duffy: Alright, thanks Paul. Thank you for your views on that. And you know, based on what you've said, I guess the question still remains, is it time for the next set of reforms? Or are we able to, to push forward in a positive way with, with the market structured the way it is?

Find out. On the next episode of Consume This.

(🎶 Outro music 🎶)

Jon Duffy: if you're looking to save money on your power bill, you could do a lot worse than heading over to our free independent site powerswitch.org.nz to see if you could be on a cheaper plan. You might be surprised how much money you can save. Typically, households save between $300 and $400 a year when they switch, and it only takes around 10 minutes, which is a pretty good return.

Full disclosure, powerswitch is operated by Consumer NZ and run by Paul Fuge, the guy off this podcast.

you've been listening to Consume This hosted by me, Jon Duffy, and with a special guest appearance from my colleague Powerswitch Manager Paul Fuge. Consume This is brought to you by Consumer NZ and this episode was produced by Tom Riste-Smith. Our thanks go out to everyone who took the time to speak with us and help us with research for this episode. You know who you are.

Keep an ear out later in Season Four when we'll be dropping some electricity bonus content, including the full interview with former Prime Minister Jenny Shipley. There's a lot of fascinating stuff that couldn't all fit into this episode.