Rising Power Prices

Electricity Networks Association

19 July 2004

Rising Power Prices

Sharp rises in electricity prices are a major concern to electricity lines businesses, which have been subjected to successive waves of regulation since being forced them to sell down their generation and energy trading arms in 1998.

News that the latest (year to June) consumer price index showed a 10.4 per cent leap in delivered electricity prices is only part of the story, according to Electricity Networks Association Chairman Warren Moyes.

“This month we’ve seen a further 10-to-15 per cent rise in charges to customers from the largest generator/retailer, plus strong indications that more increases are on the agenda based on recent announcements. For example, one of the companies that purchased the bulk of lines companies generation plants after the 1998 split has just announced that it is cranking the valuation of those plants up by a massive $420 million, noting that ‘This valuation takes account of …importantly, the expected earning streams from each generation station.’

Warren Moyes says “All businesses are entitled to earning a return on the fair valuation of assets but it would seem far more appropriate for major generation businesses to hold back on substantial asset value write-ups until they see how far their competitors in the marketplace will let them lift their earnings. It looks as though the threat of competition restraining prices is not taken very seriously in the generation/retail business.”

Warren Moyes says that the lines industry is now facing regulations to help the highly profitable major generators to extend their dominance into local generation ventures such as wind farms, while the lines industry remains effectively barred from competing with them by an ongoing ban on buying back-up power contracts.

The chart below highlights price movements in various parts of the electricity sector in recent times. The projected ‘lines component’ movement in 2004 does not include increases of about 15% announced by Transpower (the Government-owned national grid company) in April.

“In the longer term the news is not at all positive, with consumers seeing little evidence that higher generation earnings are contributing to security. We’ve already seen soaring electricity prices resulting from dry winter weather in 2001 and 2003, and also the recent supply problems in the upper South Island. These are all indicators of a fragile dry year supply/demand balance, so the prospect of another winter shortage next year, with associated much higher prices, should be taken seriously.”

“The Government appears to believe that regulation of lines companies, who’ve consistently priced moderately and maintained their infrastructures, is justifiable because of some economic principle that generator/retailers are exempt from.”

“The major generators are doing extremely well from the Government’s regulatory fixation on the lines industry, and clearly expect to continue to do so. Consumers are not so fortunate.”

See Govt Statistician’s release on June CPI at

http://www.scoop.co.nz/mason/stories/BU0407/S00150.htm

ENDS

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