7. Historical Background
7.1 The Rural Electrical Reticulation Council (RERC)
103. The Rural Electrical Reticulation Council (RERC) was established under the Electricity Act 1945. It administered a fund to subsidise lines construction, mainly to farmers in remote areas as this was where post-war productivity growth was achieved.9 The fund was created by a levy on all Electrical Supply Authorities of the time.
104. The RERC was disbanded in 1997 as reticulation was all but complete and the environment in which supply authorities operated was corporatised. Continued subsidisation was considered no longer appropriate as it was recognised that it involved significant wealth transfers from the community to individuals.10 The subsidy per connection was $21,210 (1985 dollars),11 although the connected consumers were also required to make capital contributions that were paid off over a number of years (usually ten).
105. Information from RERC details how many kilometres of line were erected by supply authorities with subsidy assistance from 1948 to 1989. This information has been used to produce the following graph which shows approximately what proportion of the networks of today's lines companies were built using subsidy.12 By 1985, 16,865 kilometres of lines had been constructed to serve around 16,229 customer connections.
106. The graph shows that some rural network areas (Marlborough, Buller, The Lines Company, Top Energy and Horizon) have over 35% their network created from subsidised lines. At the other end of the scale there are large urban - based companies such as Vector, Electra and Orion that have only a small proportion of their network made up of such lines.
107. Figure 1: Estimate of the proportion of lines built in each network area with RERC subsidy
→ Full size version of Figure 1 [235 kB JPG]
108. In 1992 the supply authorities were corporatised to improve economic efficiency in electricity supply. Because of concerns about excessive price increases, especially in remote rural areas, government policy at the time was to require the maintenance of lines in existence as at 1 April 1993, and to cap the rate of any line charge increases to 15% per annum.
7.2 Energy Sector Reform 1992
109. The Energy Sector Reform Bill 1992, enacted as the Electricity Act 1992 was formed, included provision for maintaining universal supply to all existing lines, meaning that lines would be maintained in perpetuity. Officials at the time gave several reasons for why the Government did not anticipate excessive pressure on costs to remote rural consumers:
- Lines companies would use normal price averaging for broad geographical areas to minimise administrative costs; and / or
- Companies would marginally cost remote lines (i.e. the customers would face only the costs of the part of the line that gets the electricity just to them);
- Lines companies are likely to be responsive to local community concerns to avoid undue price impacts on rural customers;
- It was also considered that there was scope for reducing the cost of remote lines – local co-operatives taking over maintenance, lowering the quality of lines (which may have been over-engineered) and developing local area supply.
110. However when the Bill was discussed at the select committee a 20-year sunset clause was added. This provided for the obligation to maintain supply to existing lines to expire in 2013, and be deemed to be repealed.
111. Reasons for including the sunset provision were:
- An open-ended (i.e. in perpetuity) obligation would make it difficult for companies to value it;
- The need not to restrict the environment for change;
- The prospect of new technologies being developed that would substitute for electricity supply by lines;
- The obligation to serve distant consumers and to charge them no more that other customers involved a subsidy that would be difficult to maintain in the face of competition.
112. This latter point was made in a different market framework, when lines companies still had retail interests.
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