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NBR covering the right questions on Auckland electricity

  • October 7th, 2014

An independent Electricity Authority report may tell us whether some of the $17m Vector  admitted to spending on lawyers and experts fighting the Commerce Commission’s methodology for price control, could have been better spent on a few sprinklers and engineers.

Wayne Brown would agree. His forthright views in the Herald, also covered in the NBR updates, fit with what appears to be a developing strategy by Vector to exploit the blackout to justify higher charges.

There is a reason for a frenzy of lobbying right now, to persuade politicians to threaten the Commerce Commission. The Commerce Commission will decide by the end of this month whether to lower the chances of lines monopolies extracting excess profits. The Commission has received evidence that the current formula for calculating the permitted cost of capital is too generous. And plenty of claims that it is not.

But curiously, in none of the expensive expert material the lines companies have put before the Commission is any evidence that they have not invested because of inadequate returns. Indeed there is a startling lack of internal evidence that returns have been relevant to their decisions at all, despite media claims (mentioned below).

With the nutty Labour/Green policy to renationalise the competitive generators (by stipulated prices) gone for at least three years, legitimate consumer concern about electricity price increases will focus where it should, on charges by monopoly lines companies.

So it would be understandable if Vector aren’t putting their faith in wininng on the facts before the Commerce Commission, and are instead trying to take their fight over its head and straight to the politicians.

 They may have some reason to think it is working, at present. As NBR reported yesterday:

 Power bills could rise
It was Auckland’s fifth major power outage since 1998

Yesterday, Prime Minister John Key said if the city wanted a “gold-plated” network with redundancy, upgrades could mean higher electricity bills for consumers.

And a bit of blackmail  statement to Radio New Zealand a month ago, telling the government that it would not extend its network for new housing areas unless it could earn more than the regulated return.

Strange then that in evidence to the Commission, which of course could have been challenged by experts, neither Vector nor Transpower provided internal evidence that they would not have proceeded with their substantial investments at a lower regulatory cost of capital, or rebutted MEUG’s challenges to them to do so.

Vector argued against the Commission relying on evidence of the actual circumstances of the regulated suppliers. It claimed that the Commission should not assume that recent substantial investments and future investment plans by EDBs and Transpower are indicative of future investment. Vector did not provide any alternative asset management or other plan in support of its submission.

Disclosure of interest – my firm has advised MEUG on the regulatory WACC issues in the Commerce Commission’s Input Methodology Determination process.


  • ben
  • October 7th, 2014
  • 12:41 pm

I think it would be a mistake to link money invested in lobbying with money invested in network. Absent a liquidity constraint, money will follow returns. I also think it is a mistake to blame a company for investing pursuing returns. It is absolutely a loss for NZ when money goes into expensive lawyers in a zero sum game, but blaming the self interested market participant for being self interested is assigning cost to the wrong place: it is the intervention in the first place that created the rent seeking opportunity. That rent seeking ought to be counted in advance as a cost of regulation, to be weighed against the benefits of limiting use of market power, but doubtless was not.

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