Firms defend 'super profits'

01:43, Jan 31 2009

Some power companies have dismissed Reserve Bank governor Alan Bollard's criticism of price rises, but industry critics say the firms are making billions in windfall profits.

Dr Bollard said this week that the sector should not take advantage of its market position with limited competition and keep increasing prices.

Household power prices have risen 6.6 per cent on average in the past three years, but Dr Bollard said future rises should be far smaller or they should even be cut.

"We get a picture of an industry that has a relatively easy time and it has not shared the pain," Dr Bollard said.

Independent energy expert Bryan Leyland estimates power companies have made "windfall" profits of $6.5 billion collectively in recent years because of the way the power market is set up.

"They have been getting super profits, windfall profits, out of us for years and years," he said. That especially applied to hydro-power producers, who inherited low-value assets and racked up their values by two or three times, lifting power prices to reflect that.


The power market was fundamentally flawed, he said, but it was not easy to fix and price controls would be just a sticking plaster.

Molly Melhuish, an energy analyst for the Domestic Energy Users Network, said Dr Bollard had given power companies "plenty of warning" about raising prices, telling the Electricity Commission that the central bank was disappointed by how fast prices were rising.

Power prices had gone up about 55 per cent since the late 1990s, which was 30 per cent ahead of inflation, and in part that reflected excess profits.

There was just a "pretence" of competition in the industry.

"They ratchet each other's prices up. The industry is fattening itself [and can] because it is an essential service."

Contact Energy announced in October a price rise of 10 to 12 per cent in some areas. State-owned Meridian has put its prices up about 4 per cent and Genesis 3.3 per cent.

Trustpower spokesman Graeme Purches said Dr Bollard's comments were "fundamentally bollocks".

"He has never spoken to us about power pricing, but the industry has clearly signalled prices were rising for some time," Mr Purches said.

Trustpower had increased most prices about 4 per cent in the past year, and up to 9 per cent in some areas because of rising lines charges.

This was mainly because of much higher wholesale prices, which were needed to encourage the building of power stations. But the cost of transmission had also risen, and there had been more modest increases in the cost of the retail business.

Contact Energy spokesman Jonathan Hill said the costs driving power prices were not linked to inflation. About half of its power was produced using gas, the price of which had risen 20 per cent in each of the past two years.

Contact was moving toward more expensive forms of power such as wind turbines, and a carbon tax was also expected in a couple of years.


The Dominion Post