Overpayment for electricity a myth, says govt consumer watchdog

Electricity Authority CEO Carl Hansen
Electricity Authority chairman, Brent Layton

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)

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16 Comments & Questions

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Can't help wondering though how the large industrials or favoured corporates of the day who were generally believed to receive extraordinarily low pricing, what impact on these reports would have if they had been forced to pay the same tariff as everyone else.

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Pricing structure based on theoritical review of replacement cost of assets not the purchase price.
Rate of return on cost price today exceeds 100%
This lad is a walking billboard for big business .

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If you read the report it's based on historical cost, not replacement cost. It also suggests prices may actually be LOWER than those contained in the report, due to the data not reflecting some of the discounting happening.

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Perhaps if we hadn't blown so much money on building useless wind turbines our consumer electricity prices wouldn't have gone up by so much?

When was the last time that generation capacity was added to the NZ network that wasn't based on unreliable wind?

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Most of the recent capacity added was geothermal - fantastic renewable energy for base load.

It doesn't require the wind to blow, the sun to shine of the coal to be dug.

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Unreliable.
Mate, come to Wellington, ours are all go, all the time.

Would you rather coal??

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Considering those hydro assets were sold off at bargain prices, of course we haven't paid the true costs, neither did the companies that took them over

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I don't believe a word of this. Power Companies routinely price the full cost of a replacement network in prices and how often does a power company fully replace a network?

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Replacing a network in one go would be an awful lot cheaper than replacing individual components over the years, whilst maintaining service to customers

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The timing of this report is horribly inconvenient for L&G, as this report makes Cunliffe and his Socialist brother at the hip Norman, look like a parody version of credible politicians in desperate need of some kind of "game changer" new policy.

Remember - a vote for Labour is a vote for Norman as Fiance Minister.

So the flawed, obscure economist report holds about as much credibility as the IPCC flawed reports on "Climate Change / Global Warming" - which is also horribly inconvenient with all the Global Warming frostbite it's giving everyone in the Northern Hemisphere.

GST on fruit & vege's has been dropped for the 3rd or 4th time, same with the first $5000 on income for everyone, so coupled with a now completely discredited and flawed economist report L&G based their economic sabotage "power policy" on - the only "policy" Labour have that still remains and is firmly imbedded, is their Man-Ban policy!

National could not have asked for a better start to an election year!

Cunliffe's only saving possibility is that Labour's logo is looking somewhat "stale" with it having an even longer tenure than it's "leader" so perhaps a "new" logo might be his saving grace!

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I wouldn't want to be engaged to Norman....!!

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The report is and will be seen for what it is a propaganda broadcast in favour of the status quo that guarantees us all inflated power costs. It is these pocket book issues that will bring down the government despite your desperate attempts at attacking the opposition.

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Regulatory capture, much?

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So, if electricity tariffs of yesteryear were under-priced, and under-charging was the name of the game, and prices weren't covering the cost of building then the taxpayer was subsidising it. Can we have our taxes back please

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Justification for a massive electricity price hike
Wonder if the share price of the newly privatised entities will rise
You betcha
Another game to inflate the share price and keep Genisis privatisation on track

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Most commenters seem more concerned with shooting the messenger instead of debating the issues (including the tiresome Geoff Bertram).

The analysis seems perfectly reasonable if you actually take the time to read it.

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