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Falling demand for electricity will push up power prices as the monopoly national grid owner, Transpower, spreads its regulated charges over smaller total consumption, warns the Major Electricity Users Group.
MEUG formally raised the issue with senior government ministers, including Prime Minister John Key, in a June 17 letter, saying "the greatest risk to near term power prices is increasing monopoly charges", claiming this has become "almost a forgotten policy issue."
However, ministers responded that they expect Transpower to fully recover its costs, even if it means higher power prices for those consumers unable to reduce their exposure to the national grid.
In a response on Aug 26, Commerce and Energy Ministers Craig Foss and Simon Bridges told MEUG that if state-owned Transpower "were to face (increased) risk asset stranding risk, then it would need to be compensated for that risk through a higher regulated return on investment."
MEUG argued that if Transpower was a private company operating in a competitive market and suffered a drop in demand for its services, it would cut its prices and write down the value of its assets.
"In competitive markets, it is economically welfare enhancing for assets to be written down at shareholders' expense rather than to the account of customers," wrote MEUG chair Terrence Currie in June. "This happens automatically in markets and the regulatory regime for regulated monopolies should mimic that outcome."
The issue is acute because Transpower has major capital expenditure underway, having spent $1.6 billion in a series of grid upgrades in the last two financial years and plans for another $4 billion in capex over the next decade. The upgrades are eliminating long-standing weaknesses in the grid just at a time when New Zealand electricity demand is flattening out.
Transmission costs make up around 8 percent of the average power bill today, but that is already forecast to rise because of the increased value of Transpower's assets. Transpower is allowed to charge a 7.19 percent weighted average cost of capital on its asset base under current regulations
However, MEUG notes that power prices in the wholesale electricity futures market show an expected average price of $72 per megawatt hour through to the end of 2016, unchanged from 2010 levels.
"If retail competition continues to improve and all else equal ... then retail margins should decrease," MEUG argues, meaning it would expect falling electricity prices.
But if the cost of distributing electricity over the national grid rises more quickly because increased costs are being spread over smaller total consumption, "there is a risk that delivered power prices will continue to rise because savings in the increasingly competitive parts of the sector are more than offset by higher monopoly charges," Currie wrote. "In some cases, fewer end customers have to meet increasing real line charge, thus compounding the effect on final prices.
"Because the price control regime effectively allows the recovery of deemed cost, as some customers find ways to minimise their usage and charges, the others must pick up a disproportionately increasing share. That will multiply the effect of increases in charges."
However, ministers said in their reply to MEUG not only that Transpower should be able to earn a higher rate of return on its fixed assets if electricity demand fell, but also that the government as shareholder should have no role in deciding to write down the value of Transpower's assets if they were being used less.
"The implication is that the government, as owner, should also play a regulatory role in determining the prudency of investments, and whether asset values and returns on investment should be lower than those already determined by the Commerce Commission.
"Such an approach would not only risk duplicating the extensive statutory regulatory processes in place, it would also risk undermining those processes," said Foss and Bridges.
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