Big power price rise foreseen

Big power users say the country could pay hundreds of millions a year more for electricity, if grid company Transpower and other lines companies win legal cases to lift returns on their assets.

That could translate into household power bills rising almost 3 per cent if Transpower gets its way in court in a case starting next month and another 5 per cent if lines companies follow suit, according to Major Electricity Users' Group calculations.

Earlier this month, state-owned monopoly Transpower, which is in the middle of more than $2 billion worth of projects on the national grid, announced it would pay the Crown a final dividend of $205 million. Earlier it paid an interim dividend of $110m, taking the total to $315m for the full year.

“It's a handsome dividend Transpower are paying their shareholder, the government," Major Electricity Users' Group chief executive Ralph Matthes said. "Only a monopoly could post such a profit year in year out."

But in the “productive sector”, including members of MEUG, a combination of the global financial crisis, weak international demand for commodities, and a high New Zealand dollar made it a challenge just to cover marginal costs, “let alone posting a profit sufficient to give shareholders the sort of dividend Transpower announced”, Matthes said.

That was shown by Rio Tinto's recent attempt to discuss getting cheaper power for its loss-making Bluff aluminium smelter, which consumes about 15 per cent of New Zealand's power.

Another big power user, the Norske Skog Tasman Mill at Kawerau, which uses almost 3 per cent of the nation's power, said recently it could cut annual newsprint production in half because of falling demand.

Markets could not stop excessive profit-taking by monopolies, MEUG said, so government watchdog the Commerce Commission was important as the regulator of the cost of capital of such firms.

The present regulated rate of return for Transpower is 7.19 per cent, which Transpower said in its annual report was “materially below a level that the directors and specialist advisers consider appropriate”.

Transpower is appealing against a legal ruling on the matter, on the "input methodologies", with the High Court case expected to run from next month to December.

Transpower said it was not seeking a specific figure for its rate of return. "We believe there are reasonable grounds for determining a higher figure than 7.19 per cent."

In the previous administrative settlement with the commission, the rate of return was 7.8 per cent.

Transpower said it had made "extensive submissions" to the commission and the court on its reasoning, but "could not speculate on the outcome".

But MEUG said the regulated cost of capital Transpower was seeking could be as high as 11.58 per cent, after tax, equal to about $174m more from Transpower customers. That would rise to $242m when Transpower was able to start charging for new assets.

If the regulated cost of capital for Transpower rises, it will also increase for regulated electricity distributors, such as Wellington Electricity and Vector.

MEUG calculated the higher cost of capital for those distributors would be $442m a year, taking the total with Transpower to $684m at the highest case.