Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


CORRECT: Overpayment for electricity a myth

CORRECT: Overpayment for electricity a myth, says govt consumer watchdog

By Pattrick Smellie

(CORRECTS reference in third paragraph from mid-1990’s to mid-1980’s)

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-1980’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.

(BusinessDesk)


© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Must Sell 20 Petrol Stations: Z Cleared To Buy Caltex Assets

Z Energy is allowed to buy the Caltex and Challenge! petrol station chains but must sell 19 of its retail sites and one truck-stop, the Commerce Commission has ruled in a split decision that acknowledges possible retail price coordination between fuel retailers occurs in some regions. More>>

ALSO:

Huntly: Genesis Extends Life Of Coal-Fuelled Power Station To 2022

Genesis Energy will keep its two coal and gas-fired units at Huntly Power Station operating until 2022, having previously said they'd be closed by 2018, after wringing a high price from other electricity generators who wanted to keep them as back-up. More>>

ALSO:

Dammed If You Do: Ruataniwha Irrigation Scheme Hits Farmer Uptake Targets

Enough Hawke's Bay farmers have signed up for water from the proposed Ruataniwha Water Storage Scheme for it to go ahead as long as a cornerstone institutional capital investor can be found to back it, its regional council promoter announced. More>>

ALSO:

Reserve Bank: OCR Stays At 2.25%

Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.25 percent, in a decision traders had said could go either way, while predicting inflation will pick up as the slump in oil prices washes out of the data and capacity pressures start to build in the economy. More>>

ALSO:

Export Values Down: NZ Posts Biggest Annual Trade Deficit In 7 Years

New Zealand has recorded its biggest annual trade deficit since April 2009, reflecting weaker prices of agricultural commodities such as dairy products, beef and lamb, and increased imports of vehicles and machinery. More>>

ALSO:

Currency Events: NZ's New $5 Note Wins International Banknote Award

New Zealand’s new Brighter Money $5 note has been named Banknote of the Year in a prestigious international competition. The $5 note was awarded the IBNS Banknote of the Year title at the International Bank Note Society’s annual meeting. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news