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.

(BusinessDesk)