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Overpayment for electricity a myth, says watchdog

Overpayment for electricity a myth, says govt consumer watchdog

By Pattrick Smellie

Jan 28 (BusinessDesk) – Claims that consumers have over-paid for electricity for 30 years are a “myth”, says the head of the Electricity Authority, Carl Hansen, with new analysis showing consumers have never paid the full historic cost of building the country’s power stations and national grid in that time.

The peer-reviewed EA report, “Analysis of Historical Electricity Industry Costs”, shows that “electricity charges in New Zealand were far below the cost of supply for many decades.”

The analysis confirms that residential customers have faced the steepest price increases since the mid-1990’s, when cross-subsidies from commercial and industrial consumers started to unwind and market mechanisms were introduced to the sector.

This change suggests “there may be scope for improvement in the retail market,” says the EA. But even so, electricity prices charged to residential consumers are still failing to cover the historic cost of investment in electricity assets, including hydro dams and the national grid.

“The results reflect the fact that, prior to the 1990’s, New Zealand governments treated water as a free resource and didn’t fully account for the costs of capital, so they built very costly hydro generation plants,” said Hansen.

While water was free, the concrete and steel required to build the dams was not.

“It is a myth that the old hydro plants were low cost for New Zealand, as they often had very high capital costs that more than offset their very low running costs. The total cost to New Zealand was often very high, but consumers were not charged the full cost of supplying electricity to them.”

The EA modelling irons out the impact of inflation over the last 30 years and assumes a weighted average pre-tax cost of capital of 10 percent. But even at a 6 percent WACC, the results are largely intact, with residential consumers paying full costs of supply for only a brief period in the mid-2000’s.

The report is the latest in a series of challenges from the EA to analysis by Victoria University Institute of Policy Studies economist Geoff Bertram, and therefore the Labour and Green parties’ policy to re-regulate the electricity industry. Bertram’s analysis underpins both parties’ commitment to unpick the current wholesale market model and charge for electricity based on historic cost instead.

The EA’s chairman, Brent Layton, attacked Bertram’s work as inaccurate and misleading last year.

However, it appears the historic cost in the Labour and Green party policies drive off valuations set at the time that state-owned electricity generator ECNZ was split into four in the mid-1990’s, rather than actual costs of construction, which the EA analysis uses.

Hansen was at pains to stress the analysis of current prices versus historic costs “cannot be used to justify current prices.”

That would require separate analysis, which the EA expects to publish later this year, although the report itself does draw some conclusions, including that “residential consumers as a whole do not appear to be achieving the same reduction in retail margins as other consumer types.”

“However, anecdotal evidence suggests that residential consumers are often receiving significant price reductions when they shop around for lower prices, or when retailers approach them to switch to them.”

It also argues residential consumers were more expensive to service than commercial and industrial consumers, whose demand is larger and less volatile across the course of a day or season.

The 30 year analysis shows that residential consumers were paying far less than the historic cost of electricity supply than other consumers until the early 2000’s, and did not even start fully covering the cost of electricity generation until 1989.

Reflecting more aggressive pricing and a substantial jump in natural gas costs, the under-recovery in all categories of consumer shrank to its lowest in the mid-2000’s, before starting to expand again in recent years as wholesale electricity prices fell amid lower demand and reduced gas use, the report says.


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