Power bills could rise 'by 5pc'

18:23, Sep 26 2010

Average household power bills could rise up to 5 per cent if monopoly watchdog the Commerce Commission gives in to electricity lines companies, according to big power users.

Consumers could pay $354 million to $531m too much for electricity if the commission accepted the arguments of monopoly lines businesses about their returns, according to the Major Electricity Users Group (MEUG). That would equal an increase of 4 per cent to 5 per cent for average household bills, which was more than the impact of the emissions trading scheme, according to executive director Ralph Matthes.

There are about 28 lines companies, including the likes of Vector and Orion, which have their charges regulated, along with grid company Transpower, while power retailers' prices are not controlled.

If the commission accepted monopoly company submissions, returns on capital would rise by 2 per cent to 3 per cent above the level in the commission's draft, Mr Matthes said, which would add up to $531m a year in charges, which was "excessive".

On an average household bill of $2200 a year, lines distribution costs make up about 29 per cent, with Transpower's transmission costs about 8 per cent. Generation accounts for about 36 per cent. Retail costs and GST make up the balance.

On Friday, Transpower said its prices would rise by "double digits" starting next April to help pay for the company's $3.8 billion investment programme over five years. Transpower's prices would rise more than 10 per cent a year for three years.

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Earlier this year, lines company Vector said draft determinations from the commission on regulated rates of return for electricity network assets were "unconducive" to investing more in New Zealand.

Even at 8.82 per cent, the high end of the proposed band of potential returns, there was "little recognition of the need to attract offshore capital", Vector chief executive Simon Mackenzie said.

"That is at least 50 basis points below Australian regulation, when we would expect New Zealand WACC [weighted average cost of capital] to be higher than in Australia."

The commission is considering submissions on how it should determine the cost of capital for regulated lines companies, and a decision is due by the end of the year.

Cost-of-capital calculations are used to set permitted revenues for monopoly companies such as state-owned national grid operator Transpower and local lines companies.

A rate set too high would flow through into line charges, Mr Matthes said.

A high rate would encourage "gold plating" by lines companies to over-invest to get an over-generous return on as much capital as they could spend, he said.

Even if no new investment was made, companies would still get a benefit from the higher return on past spending. A low rate could see under-investment.

MEUG's submission has a mid-point estimate of cost of capital, after tax, of 6 per cent, compared with the commission's 6.5 per cent.

Transpower's mid-point was 8.1 per cent, but ranging up to 8.7 per cent according to experts Cameron Partners.

Estimates for line distribution businesses were 8.6 per cent at the mid point according to estimates from PricewaterhouseCoopers and LECG.

BusinessDay.co.nz