Power Companies' Performance Shows Need for Reform

  • Max Bradford

Information disclosed by electricity companies reinforces the need for further reform, Energy Minister Max Bradford said when he released the 1997 electricity information disclosure statistics today.

The Electricity (Information Disclosure) Regulations require electricity companies to disclose publicly a large amount of information. This is the third publication of information disclosed since the regulations were introduced in 1994.

"The purpose is to make transparent any disparities in the performance of electricity line businesses while fostering competition in generation and retailing. In particular we want to make sure that businesses are not using line charges to pass on the costs of inefficiencies or to make excessive profits," Mr Bradford said.

The 1997 statistics show seven companies had line businesses with Accounting Rates of Profit (ARPs) in excess of 11 percent for 1996/97.

"That level of return is above the cost of capital (allowing for a normal rate of return) to a low risk business such as an electricity line businesses. There has already been adverse publicity about the highest of these, the return of over 30 percent for Southpower," Mr Bradford said.

"I understand that in six of the seven cases the high profits were associated with revaluations of the line assets. But since the method of valuing assets is prescribed in regulations which have been in place for three years now, the question naturally arises why some companies previously got their valuations so wrong?"

As well as performance statistics, the report records tariff movements for domestic and commercial consumers for each power company..

since 1984 in real terms the national average unit cost to a medium commercial consumer (18,000 kWh pa) declined 22 percent from 15.9c/kWh to 13.1c/kWh.

since 1984 the average unit cost to a medium domestic (12,000 kWh pa) consumer increased 23 percent from 10.2 to 12.5c/kWh.

over the three years since 1994 both line and energy charges to all classes of smaller consumers increased in real terms

increases in line charges were significant - a 33 percent increase for the medium domestic consumer, and a 14 percent increase for the medium commercial consumer.

increases in energy charges in real terms to smaller consumers over the three years were between 1 and 2 percent.
"Line charge increases are disquieting, although they should be viewed in the context of an industry where many of the line businesses are still making relatively low rates of return.

"I have real concern about energy charges. These increases occurred during a period in which wholesale energy prices fell by approximately 6 percent."

"Moreover, some companies' prices appear to be well out of line with national averages," Mr Bradford said.

For example:

one company charged around 17c/kWh when the national average price for a medium commercial consumer in April 1997 was slightly over 13c/kWh - a 31 percent difference.

the national average line charge component for medium commercial consumers was just under 5c/kWh, yet some companies charged around 8c/kWh.

the average energy charge component was about 6.5c/kWh, yet the highest was around 9c/kWh.
"As I recently stated to the Electricity Supply Association of New Zealand, it seems to me that many of the gains of reform and deregulation at the generation and transmission end of the market are being soaked up in retail power companies.

"The Government is currently working on the next stage of reform in the electricity sector. That package includes a further split of ECNZ, and simultaneous reform at the power company end of the industry.

"We have to reduce the costs of producing and distributing energy in general and electricity in particular, to enhance the competitiveness of New Zealand exporters and business.

"Most importantly, consumers deserve a better break in terms of choice and control over their power bills. Only effective competition will achieve that, and we do not have effective competition as yet.

"We have only one more opportunity to get the structures and the incentives right to ensure the legacy of 10 years reform is a truly competitive electricity market."

Mr Bradford said he expected all necessary policy decisions to be taken by the end of the year, with any required legislation completed in 1998.