Speech by Dr John Small: National Lifeline Utilities Forum

The following text provides written highlights from an address delivered by Dr John Small, Chair of the Commerce Commission, at the Lifeline Utilities Forum in Hamilton.

Why the Commerce Commission cares

Thank you to the organisers for inviting the Commission. I was the one who drew the lucky long straw to come and talk to you today, and to listen to you.

It's been a fascinating morning. I particularly enjoyed Mayor Rodney Dow's presentation. There was a lot of personal experience in there and I think it resonated with many people in the room.

Almost all of us, judging by the show of hands earlier, have been through some sort of natural disaster. We're familiar with that rush of adrenaline when something happens, followed by the much longer and more tiring pace of recovery.

That's one of the reasons this conversation matters.

The Commerce Commission has a pretty broad remit across the economy. We deal with competition law, fair trading, and the regulation of a number of industries. That includes economic regulation of electricity lines businesses and gas networks, promoting competition in areas such as groceries, and more recently taking on responsibilities in the water sector.

One way to think about what we're interested in is that we're mainly focused on the non-tradable parts of the economy. We don't really care if exporters are earning a huge amount of money on their exports. That's great. What we're focused on are sectors where import competition can't easily discipline prices or service quality.

Our job, under the Commerce Act and the other legislation we administer, is to promote the long-term benefit of consumers. The long-term part of that is especially important.

You can make consumers better off in the short term by pushing prices down. But that only lasts for so long. Assets wear out, investment dries up and service quality eventually suffers. The long-term interests of consumers require providers to earn enough to stay in the game, while ensuring they don't earn more than they should. Our job is to find that balance.

In sectors such as energy, communications and water, we're trying to push firms in much the same way competitive markets would push them if competition existed.

That means we're interested in:

• efficient capital investment
• operational efficiency and asset management
• service quality
• pricing discipline.

Resilience touches all of those things. Ultimately, we care about resilience because consumers do.

The stakes are high

The stakes are substantial.

Analysis covering the 15 years from 2010 showed disaster response and insurance payouts amounting to billions of dollars, averaging around $4.2 billion annually across the public and private sectors combined.

The obvious question is whether it makes economic sense to get ahead of at least some of those costs. Can we invest now in ways that reduce the cost and disruption of future events?

Behind those numbers are real communities and real experiences.

Here's Westport in July 2021.

At the time, I was living in Rai Valley, not that far away really. A month later, there was a house parked on the road blocking our exit from the valley.

We had one of these events just a couple of hundred kilometres away and then, a month later, another enormous hit. It happens. And the human cost when it happens is pretty shocking, really.

Resilience investment as insurance

It's pretty obvious that investing ahead of disaster events can make recovery faster, cheaper and less disruptive.

The hard question is how much to invest, where to invest, and what types of investment make sense.

Nick Blakely referred to resilience as a form of insurance, and I think that's a useful way to think about it. You're paying something up front in the hope that if something bad happens later, the impacts are reduced.

But resilience is also quite different from traditional insurance.

Take vehicle insurance. If you don't insure your car, bad luck. If you have an accident, that's your problem. If you do insure your car and have an accident, good luck. The costs are largely individual.

Infrastructure resilience works differently.

First, we're usually talking about physical investment rather than financial investment. You don't write a cheque and walk away. You build a stop bank, strengthen a network or create an alternative pathway.

Second, the benefits are shared. Infrastructure serves groups of people. What benefits one customer connected to a feeder line generally benefits everyone connected to that feeder line.

Those shared benefits make resilience more challenging. Markets will tend to under-provide it, consumers ultimately pay one way or another, and understanding what people actually value is not always straightforward.

Different types of resilience investment

When people think about resilience investment, they often go straight to hard infrastructure.

Certainly, some of it is concrete, steel and piles of rock.

Examples include:

• network redundancy
• spare capacity
• stop banks
• other physical protection measures.

But resilience comes in many forms.

Some of it is green infrastructure such as flood paths, stormwater management systems and rain gardens that help absorb and manage excess water.

Some of it is systems capability, including:

• early warning systems
• civil defence arrangements
• emergency response capability
• recovery planning.

And some of it is social.

The relationships we have matter. Knowing who to call matters. Telephone trees matter. Neighbours calling people downstream to say, "watch out, it's coming", matters.

It's easy to focus on the next thing somebody wants to build, but resilience is broader than that.

Interaction and collaboration

Infrastructure networks don't operate in isolation.

Power networks rely on communications. Communications networks underpin water, transport, payments and many other services.

When one network fails, it can quickly affect others. A road washed away may take fibre and electricity infrastructure with it. Before long, one failure becomes several.

That tells us we need to work together before things go wrong.

It means:

• planning together
• sharing information
• understanding interdependencies
• coordinating response and recovery plans.

The encouraging thing is that New Zealand already has strong foundations.

This forum is a good example. It has been built up over many years by committed people who recognised the importance of resilience before it became a mainstream discussion.

The regional lifeline groups are valuable. The Natural Hazards Commission does important work. More broadly, what we see is a genuine public-private partnership involving infrastructure providers, councils, emergency management organisations, regulators and communities.

At the Commission, we want the organisations we regulate to participate actively in those networks, strengthen them and help make them effective.

The regulator's view

One of our jobs is assessing capital expenditure proposals in some regulated sectors.

When we do that, we're acting as an agent for consumers.

Our objective is to allow prudent investment, including resilience investment, while preventing expenditure that is excessive or unsupported.

Sometimes that means approving significant investment programmes. Sometimes it means saying no to parts of a proposal.

We're trying to make it possible for the good stuff to happen, whether that's resilience, replacement, growth or renewable energy investment. At the same time, we need to distinguish that from excessive or what regulators often refer to as "gold-plated" plans.

The reason is simple. Once we allow expenditure, we're effectively allowing the company to recover those costs from consumers. So we have to be satisfied the investment is justified.

That is why we encourage firms to think about resilience early, test their assumptions and engage with customers to understand what people value and what they're willing to pay for.

We're not micromanagers though. Absolutely not.

Running the business remains the responsibility of the infrastructure provider. Our role is to drive good performance through a framework of incentives, rewards and penalties that encourages outcomes consumers value.

What good looks like

Ultimately, consumers pay.

They pay in advance through investment, they pay through higher outage costs after a disaster, or they pay through some combination of both.

That means firms need to understand what consumers actually want.

In some circumstances, very high reliability will be worth paying for. In other situations, particularly where the costs of providing additional resilience are extremely high, consumers may reasonably prefer lower levels of reliability.

Good resilience decisions require:

• robust evidence about risks and potential improvements
• evidence on costs and benefits
• a clear understanding of consumer preferences
• confidence that consumers are willing to pay for the proposed investment.

Guidance

To this end, we've published draft resilience principles. We received around 40 submissions and held an open workshop last month. One of the challenges is getting principles right. You want them to be broad enough to have general application, but specific enough that they actually provide guidance. A lot of the discussion has focused on the proportionality of investment and the maturity of organisations' approaches to resilience.

So I'll stop there, there's a few minutes left, but I'll call it quits there.

Thank you very much.