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$150m power price savings now up to ComCom

  • December 19th, 2013

The Government should be grateful to Clifford J for his (and Messrs Shogren and Davey’s) electricity price control merit review decision (click on Wellington International Airport Ltd & Ors v Commerce Commission ) . If  the Commerce Commission picks up the baton thrown by the High Court, there could be a $150m election year announcement of a reduction in cost to consumers. From 2015 to 2020 it could save up to $750m. MEUG sought this for its members and all consumers.

But it now depends on the Commerce Commission. Because of the way price-quality paths interact with Input Methodologies, if the Commission does not bring forward a review of the current IM before the end of September next year, the monopoly suppliers will retain their current ability to extract excessive profits until 2020. The scheduled 2015 reset of their price-quality paths will apply the current, uncorrected IM for the full length of the paths till 2020, even though that current IM must be reviewed in two years time.

The Commission could have a busy January, working out how to resource a review of the Cost of Capital Input Methodology for completion by September 2014. If they can’t do it, they’ll leave years of uncertainty for investors in the regulated suppliers.

It is possible, but not at all certain, that it could be clarified on appeal. The Court of Appeal may share the High Court’s strong views ( see paragraphs 1472 to 1486 in the decision linked above) on the errors in the Commission’s approach without disturbing the High Court's narrow view on its power to send an issue back to the Commission for correction.  So the mistake could apply uncorrected for the next six years. The Commission now has nine months to avoid being blamed for the next 6 years' extraction of monopoly profits for which the High Court could see no justification.

The impact of the mistake is exacerbated by Vector’s small win in the High Court merit review. They gained an ability to seek a reset of DPP part way through a DPP period (5 years) to cover costs incurred from catastrophic events. Read with the recent Orion CPP decision the “pure” ex ante set and forget regime is heavily undermined. The pure regime allows suppliers during a period to take excess profits from being more efficient than the ex ante set parameters, but also to accept the downside of increasing costs.

Now suppliers can seek ex post compensation for “unexpected” costs but customers have no right to seek a DPP reset to share wind fall gains. The reduction in risk to suppliers as a combined result of the High Court decision and the ComComs’s liberal interpretation of “catastrophic event” should also affect their beta. If more suppliers risks’ can now be laid off to consumers, there is even less justification for them to retain permitted WACCs that are by definition expected to be higher than market.

Comments

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This all appears to be an extremely convoluted “cost plus” method of pricing electricity.
To my simple mind, the value of something is the price that a buyer is prepared to pay.
The value can easily be less than the cost of production, in which case the appropriate outcome is that no transaction ensues.
The value could easily be far more than the cost of production, in which the great profits ensuing result in alternative suppliers and alternative solutions.
The overall financial health of the community relies on such mechanisms being free to operate, so that optimum choices are free to occur.
Tweaking the rules by which the Commerce Commission regulate the price of power seems to me like Machiavellian manipulation of the inner workings of the old Soviet command economy- and with the same potential inefficient and catastrophic outcomes.

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  • Stephen
  • December 21st, 2013
  • 6:03 pm

John

The problem that results in regulation of network (natural) monopolies in almost all countries, is that even super-profits are unlikely to generate new entrants in the short or medium term. Technology changes may in the long run, but in the meantime the distortions caused by very high cost networks are thought to impose third party costs (loss of dynamic efficiency as well as allocative effects) that justify administered pricing.

The New Zealand approach is to try to mimic the pricing that would occur under workable competition.

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I wish I knew more about how the various price-quality options are currently priced. When I was involved (as Generation Engineer Gas Turbines, with NZED, ECNZ, then Electricorp) it was apparent that transmission had different values related to: 1 Time of day, 2 Load profile, 3 Power factor and reactive VAR’s, 4 Distance.
Of course none of this was priced or charged at the time.
Now I would hope that if these factors are correctly priced in, that an energy user could tailor their demand to optimize transmission costs- e.g. run high wattage loads at low demand times, consolidate demands to give better load profile, carry out power-factor correction, etc.

I wonder why, then that transmission users could not ‘tender’ for their supply requirements, in the same way that they currently bid for their energy requirements. This would then create a competitive market.

Power Shop might, for example, offer me a regulated energy supply with a CHOICE of available hours- at different prices. I might need to invest in smarter meters to take advantage, but this would be market controlling transmission pricing.

Or perhaps I should just stick to being an Engineer, and leave the law to the lawyers!

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