Electricity Price Review protects the industry, not consumers

Relief for consumers from unfair electricity prices? Not on the Electricity Price Review's watch, says Geoff Bertram

As expected, the report recommends taxpayer subsidies to help the poorest households pay their bills, underwriting the industry's revenues.  Other recommendations usefully address two well-known retail-market rorts: the use of early-payment discounts that benefit the rich at the expense of the poor, and predatory-pricing "win-back" practices.

Banning early-payment discounting, the panel suggests, might save consumers up to $45 million a year – about half of 1 per cent of total industry revenues.  Adopting all the competition-enhancing recommendations in the report might at best cut 1 per cent off the industry's $7 billion of total revenues.

Take first the asset valuations used by the Commerce Commission to set the price consumers must pay to the distribution companies.  The review acknowledges that going back to historic-cost valuations as the basis for regulated lines charges would benefit consumers.  But the protection of shareholder value is paramount: "there are costs, in terms of investment certainty, to trying to unwind historic revaluations …  There is little gain in trying to unwind revaluations more than two decades old".

My estimate of the so-called "little gain" is a potential saving to consumers, and corresponding loss to the companies, of about $200 million a year, with the lion's share of the gains going to households.  "We do not favour this option," the review panel concludes.

Then comes splitting up the vertically integrated gentailers which is, unsurprisingly, vigorously opposed by industry insiders.  It would, as the review panel correctly points out, "substantially change New Zealand's electricity market and disrupt many businesses".   But "so far as we are aware, no country has required separation of generation and retailing".

That careful wording delicately avoids any need to mention that, in 1995,  the British regulator actively blocked vertical mergers of large generators and retailers because of the anti-competitive implications. It also saves the panel from having to even mention the Labour-Greens 2013 "single buyer" proposal.  "We do not favour this option," the panel hastily concludes.

Next, logically, would come the option of unwinding another element of the 1998 "Bradford reforms" – the "lines/energy split" which tightly restricts construction and operation of generation facilities and retail operations by lines companies, and thereby blocks the emergence of locally based integrated community energy providers that could combine distribution networks with distributed supply from solar panels, batteries, wind and small hydro.  That could pose a really serious competitive threat to the big incumbents. The review panel doesn't even mention it.

How about renationalising the industry and returning to the old model of providing electricity at cost as an essential service?  "Unnecessary or impracticable", says the review panel, before excluding this from its list of options put out for consultation.

Other possibilities for direct Government intervention – for example, construction and operation of renewables-based generation on the margin of the wholesale market, as a means of restraining spot prices and covering the dry-year problem that three decades of the market-based experiment have failed to solve – don't rate a mention.

What then of the excess profits secured by manipulation of the market spot price by the big gentailers? Two economic studies, by Frank Wolak and Stephen Poletti, have found that the excess of spot prices over short-run marginal cost has amounted to billions of dollars.  The industry's limp excuse, echoed (with no reality check) by the review panel, is that the excess margin is needed "to cover fixed costs".

So here's the problem. "Fairness" is a contested notion.  When she set up the review, Energy Minister Megan Woods provided no definition.  The review team, as it is entitled to do, has taken the view that it would be unfair to disrupt established businesses, property rights, profit expectations, and legally acquired market power, just to make life easier for residential consumers.

The present structure of the industry, including its right to extract excess profits from its consumers, has been hard-wired into New Zealand law by our elected Parliament.  More affordable electricity for households would increase "wellbeing" – but would come at the expense of industry stakeholders who would undoubtedly see it as "unfair".

Yet the review agrees there is "a regulatory gap in the protection of household and small business consumers", and feels the need to point out that "consumer protection is consistent with the 'long-term benefit of consumers' ", even if the Electricity Authority disagrees. Watch this space – but don't hold your breath.

  • Geoff Bertram is a senior associate at the Institute for Governance and Policy Studies. This editorial was originally published on Stuff.