Lid blown on power price rort
3 February 2013

By Susan Edmunds.

Consumers pay up as companies revalue assets.

Kiwi power prices have increased at twice the rate of most other countries over the past three decades. A book next month from Victoria University researcher Geoff Bertram, Evolution of Global Electricity Markets, claims New Zealand's power prices are now more than twice what they were 30 years ago, in real terms.

In the United States, Britain, Japan, France and South Korea, inflation-adjusted power prices are below what they were in the mid-1980s.
In South Korea's case, they are almost 50 per cent lower.
Australia, Germany and Canada's prices are slightly up and the European OECD countries are paying virtually the same as they were in 1985.
Bertram said New Zealand customers were being ripped off because, unlike most countries, there was no regulator keeping tabs on power prices.
"These guys have the market power and they are using it."
New Zealanders pay substantially more for power than consumers across the Tasman.
In 2010, Australians were paying 14.83c per kwh, while in New Zealand power was retailing for between 22.7c and 24.97c per kwh.
Bertram said that for several years, power companies were revaluing their assets on paper and using that as a basis to increase their prices.
A profitability analysis of Meridian, Genesis and Mighty River conducted by Ernst and Young in 2011 estimated that economic profit totalled $3.8 billion between 2002 and 2011, on total revenues of $42 billion.
Their invested capital rose from $4 billion in 2002 to nearly $12 billion in 2011 but most of this increase - $6.2 billion, according to the companies' annual reports - was asset revaluations, with less than $2 billion representing the historic cost of net actual investment.
Those increases in asset values went untaxed but made their returns on investment look low, which justified price hikes, he said. Genesis did not want to comment on the revaluations and Mighty River said it was a question for the Electricity Authority.
But while consumer prices have soared, industrial power prices have remained stable and commercial prices have dropped.
Bertram said it was because residential customers didn't have the power of big business.
"It's open season to screw anyone who can't fight back."
But he said nothing that was being done was illegal, because companies were free to operate in a way that maximised profits.
"If it's highway robbery, we lock those guys up. But if companies put a gun to your head and take your money, it's knighthoods and bonuses for the CEO."
He said power companies should look to do the kinds of deals they were doing with big business.
Rio Tinto's aluminium smelter is the country's biggest electricity consumer and gets a special low price for it.
"There's no reason residential consumers couldn't have had that deal."
Electricity Authority chief executive Carl Hansen said South Korea had increasing government subsidies for residential electricity consumers, which would explain its drop in price.
"Likewise, the retail prices for many of the countries in the chart are set by government without attempting to reflect the cost of supply."
New Energy Minister Simon Bridges would not comment.
Hansen said the cost of generation had risen substantially. "The price of electricity in NZ in 1985 was insufficient to cover the cost of supply, which means prices had to rise even if costs didn't."
A spokesman for the Ministry of Business, Innovation and Employment said there was evidence that competition has increased in New Zealand.
Hansen said, "It isn't obvious to the authority that there is any value in comparing NZ electricity prices with other countries. From an electricity perspective, New Zealand is an island."
By Susan Edmunds


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