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Power companies absorbing some cost increases, EA says

Power companies absorbing some cost increases as competition rises, says regulator

By Pattrick Smellie

Feb. 5 (BusinessDesk) – Electricity companies are absorbing nearly twice as much new cost as they’re passing on to their customers as the retail market for power becomes increasingly competitive, the industry’s regulator, the Electricity Authority, says.

Analysis from the EA says the costs facing a theoretical stand-alone retailer have risen faster than residential prices since September 2010, when the authority’s pro-competition agenda started to get into full swing.

“The new analysis shows the costs incurred by electricity retailers over the last three years have increased by 21.5 percent, whereas prices charged to consumers over the same period went up by 12.5 percent,” said the authority’s chair, Brent Layton.

However, the authority made no analysis of whether that squeeze is affecting power company profitability, saying that was not its job.

Its mandate is to promote competition, reliability and efficiency.

“Profitability may provide some signals on that in a broad sense, but not very good signals,” said Layton, who acknowledged the authority was struggling with a “perception problem” that the electricity market was not as competitive as it believes it has become.

Layton and the authority’s chief executive Carl Hansen lay much of the blame for that on widespread media reporting of work by three critics of current market settings: long-time consumer advocate Molly Melhuish, Victoria University academic Geoff Bertram, and engineer Brian Leyland.

Today’s release is the second in a fortnight seeking to demonstrate that public perceptions about the industry are incorrect. Last week, the EA released analysis showing that far from paying too much for power, based on the historic cost of building electricity generation assets such as hydro dams, consumers had consistently under-paid over the last three decades.

That paper provoked a furious response from Bertram, whose claims that New Zealand power prices have risen the most in the OECD since 1985 was debunked by the authority last year.

However, Hansen defended the authority’s singling out of individual critics, saying Bertram was “not a very careful analyst” who was often called a professor and economist when he is neither, but “a geographer” whose work displayed “his lack of technical ability.”

Bertram is a long-time critic of pro-market economic policies and also co-authored a critique, published today, challenging the government’s claims about the $5.5 billion value of the Trans-Pacific Partnership trade deal to New Zealand, and suggesting they may be as little as a quarter of that.

The EA also believes that statistics showing a 3 percent rise in electricity tariffs for residential consumers last year is overstated, since data collected by the Ministry of Business, Innovation and Employment is not catching special discounts being widely offered to entice customers either to switch power companies or remain with existing suppliers.

“In 2013, there were plenty of discount deals for active electricity consumers who shopped around,” said Layton in a statement. “Residential consumers were offered between $80 and $300 in discounts, effectively giving price reductions ranging from 3.7 percent to 13.8 percent for an average consumer,” based on an average delivered electricity price of 28 cents per kilowatt hour.

Despite official inflation statistics not measuring such discounts, they showed electricity costs falling 0.4 percent in the last three months of last year – a fact barely reported by the news media, Layton told a stakeholder’s breakfast in Wellington.

However, he warned consumers not to expect power prices to fall just because demand was flat, as power producers would react by turning off the most expensive sources of generation.

“The intersection of demand and supply determines price,” he said.


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