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Power report ducks question of fair prices, Bertram says

Taking electricity company asset values back to 1999 levels, as proposed by the Labour and Green parties, would allow consumers to be charged "fair" prices for electricity, says industry reform critic and Victoria University academic Geoff Bertram.

Responding to a report authored by the Sapere economic consultancy for Business New Zealand, which argues the retail electricity market has become competitive and that Labour and Green party policies could push power prices higher, Bertram says "the authors have simply ducked the question of what is a fair electricity price."

"Regulators in countries such as the US and the UK set prices after asking 'what is a fair return on the capital generators have actually invested?'" said Bertram. "The Sapere report does not go there."

Instead, it argued that "today's inflated values" for electricity assets should be confirmed, which then allowed Sapere to argue that prices would be higher than lower than under the Labour-Greens proposals.

"Labour and the Greens propose to bring asset values, and so prices, back down to historic cost in order to reverse the huge wealth transfers from consumers to the companies over the past decade," said Bertram. "They plan to take the valuations of generating assets back down to where they ought to have stayed after the 1999 privatisations (of formerly state-owned Contact Energy), and in the process bring down prices for residential customers."

The Sapere report cites the actual development costs of some of New Zealand's largest hydro projects, including the Clyde and Tongariro projects, to argue that "measured in today's dollars, the historic cost of much of the hydro generation plant exceeds current values and hence a far return would not reduce prices."

"Over the life of these assets, valuations have been made at various dates which may be lower than the historic cost of current values (such as when assets were transferred from a government department to a state-owned enterprise).

"Selecting and imposing one of these valuations on the current owners of the assets is not supported by economic arguments and would be likely be viewed as capricious by investors in long-life assets.

"It is for these reasons that the experience to date in New Zealand and elsewhere in the world is for governments to adopt the most recent valuations as historic cost values when regulation a move from current valuations methods to historic cost methods."

The report argues the Labour-Greens central buyer policy for wholesale electricity is not properly targeted at retail competition, could lead to higher prices if true historic costs are used, and appears to imply a 40 percent drop in current wholesale electricity prices to achieve power cost cuts to households of around $300 a year.

Moving to a central buyer would also discourage smaller, new entrants to electricity retailing in favour of very large retailers seeking economies of scale, which would stifle innovation.

"This is perhaps why no country has managed to implement retail competition under a single-buyer wholesale model," said the Sapere authors, Kieran Murray and Toby Stevenson, who were involved in the implementation of reforms in 2010 that are credited with improving the competitiveness of the retail electricity market.

The report says electricity price rises have not been well explained, transparency of pricing is inadequate, and that government interventions akin to the Accommodation Supplement may be justified to deal with the fact that energy poverty is on the rise.

Simply lowering prices would not necessarily solve energy poverty, since for many people, the issue was the quality of their housing and inability to afford energy efficiency investments.


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Comments and questions

"the huge wealth transfers"

The use of loaded, emotive language like that which one typically associates with the Left, really does call into question Bertram's objectivity and raises issues around whether or not there is a certain politico-economic bias at work here.

An evidence based approach like this is welcome relief, compared to the ideological rubbish dressed up as pragmatism by National/ACT zealots. Populism and emotive statements intended to evoke gut reactions are found more often coming from the right, than the left, and I'm spoilt for examples of this to cite, for those so deluded as to believe pragmatism exists in the right.

It is embarrassing to see people repeatedly prove themselves keen to seek evidence to assert forgone conclusions. This disregard for science and the scientific method is found only in ideological camps, such as National. Even the Greens will admit their failures more often than National's overzealous ilk.

Your comments are an example of the ideological rubbish you are trying to attribute to National and ACT. Bertram has shown little objectivity to date, as demonstrated by his emotive language. If there has been any "profiteering", most of it occurred under the last Labour in order to take large dividends out of the SOE gentailers, to fund out of control government spending.

New Zealanders have been paying too much for infrastructure and utilities ever since the "reforms" started 25 or more years or so. Profiteering in those sectors has not only impoverished us, it has also harmed our international competitiveness. It is time for a Counter-reformation, but most of the published analysis is biased in favour of the new status quo. Thank heavens for the balance provided by Geoff Bertram

I agree.
One only has to witness the feeding frenzy and massive profits to the lucky some who survive and win the bidding process for supply, build and maintenance. The most expensive contract legal teams and eye watering priced consultants engaged to micro manage any supposed negotiations in a massive corporatised trough of money all in a tiny little economy.
These profits are wrought from layers of duplication in a pretense of free market economics.
The ordinary householder though knows that once we get past the expensive deceit of which retailer can pay for the glitzy TV advertising and the ease of supposed swapping of supplier, waking up to no hot water because some numpty didn't program the ripple control for a whole suburb and you then discover all the neighbours with different merchants end up dealing with the same call centre sweetie who is contracted by just one monopoly wholesaler wanting $$ to come and check your cylinder for a problem they caused. The system sucks and as for NZ knobbled smart meters, I cant even get data for 3x days yet folk overseas can monitor theirs minute by minute real time. We pay too much for a rubbish service. Mr Bertram is right to challenge matters.

There is a national interest in ensuring that the power companies are economically viable and have adequate profitability to withstand fluctuations in generation costs, to allow the orderly replacement of plant, and to withstand market vagaries caused by shifts in population (the hydro schemes are all south of Auckland) and the demise of power intensive industries. The profit may average out to be rather more or less than ideal, and this could be returned or levied on households if a government chose to regulate prices. Why they would choose 1999 prices (adjusted for inflation?) seems pure economic sophistry. In any case $300 a year, if there really is overcharging at that level, is barely a week's food billl: far bigger savings could be made in most households by getting into the habit of switching things off when not used.

We shouldn't have to switch things off, technology is almost at a point where it can figure out for itself when its not being used and turn itself off.

Smart technology will start to warp the market over the next few years regardless of intervention. Who cares about the price, subsidise smart meters and smart technologies and we'll all be better off sooner.

Smart meters are already 'subsidised' - retailers have installed hundreds of thousands at no cost because it saves them money on meter reading.

Unfortunately there are next to no smart appliances to take advantage of them. If you are going to subsidise anything, subsidise them because consumers don't seem to be interested. Google closed its home energy management service because people didn't use it, and that didn't even require a smart meter.

When the electricity market was set up, the WEMDG group responsible had expert advice that a single buyer market was the least risky option. Unfortunately, they chose the more risky one and New Zealand has paid dearly for this mistake.

The Labour/Green proposal is a parody of a proper single buyer market and is not worth considering.

A proper single buyer market taps into an internationally competitive market in building and operating power stations against a long term contract. This is a market in the true sense of the word.

The present market deals with a commodity that is not price sensitive and does not have an alternative good. So it is not a market that Adam Smith would understand. It is a bit like calling a frog a bird and expecting it to fly. All it does is croak! Generators are often in a position when they can manipulate the market and they often do.

But all the commentators carefully avoid discussing other aspects of the industry that could be easily fixed and that of cost consumers millions – maybe billions – of dollars.

Yeah, but no other commentator has your deep understanding, knowledge, tenure, earned respect, commercial and technical expertise Mr. Leyland. Most are out of their depth by comparison.

Please tell us how this single market would work?

Congratulations on a well written and insightful comment. One issue yet to be addressed is the way that lines companies charge - supposedly governed by the comcom. As a client of the lines company (TLC) their move to merky load shedding practises and phantom reporting will soon spread to other lines companies in NZ. This will likely see significant price increases justified by the old line that they are addressing decades of under investment.

Why is the 1999 value the correct one to use?

And if our prices are middle of the pack re OECD, then are we really being overcharged or just undercharged in the past?

Following Dr Bertram's logic, Chorus' prices would be set using the 'historic cost' at which they were valued on separation day. There would be no contention such as has arisen with the recent downward valuation reflecting the constantly decreasing current costs of providing the service. Of course that would mean that there would never have been any expectation on the part of customers that prices would fall. 'Axe the Tax' would have been irrelevant as there was no margin from which the historic cost could have fallen to create the margin arbitrage that fuelled this debate. It also shows the fallacy of Dr Bertram's argument. If customers are to get any benefits from falling current costs, then current prices must be used, not historic ones. When costs increase, it is the current and future cost expectations that set future investment strategies. not historic ones. Of course, as a consumer I would prefer to pay using historic cost when underlying costs are increasing, and current cost when they are decreasing. If it is 'fair' - in fact mandatory - that current cost be used in telecoms, then why should it not be used in electricity?
Perhaps someone should ask Dr Bertram to affirm that he believes the 'fair' price for Chorus' network is yesterday's, just as he claims for electricity!