$700m saving from power price controls

Consumers could benefit by up to $700 million from proposed price controls on Transpower, the Commerce Commission said yesterday.

Explaining its decision last December to impose price controls, the commission said Transpower was unjustified in trying to charge its customers for investments in projects that were still on the drawing board.

Before the proposed price controls were announced, Transpower had planned to increase prices by 19 per cent this year and 13 per cent for each of the next five years to pay for a $3.4 billion upgrade for the national grid.

But the commission said Transpower was trying to recover investment costs for projects that had not even been approved.

It said if prices were controlled then consumer benefits of up to $700 million would flow from efficiencies and limiting excess profits. But controls would not compensate consumers for past overcharging, rather they would constrain Transpower in the future.

Transpower's charges are levied on consumer power accounts and account for just under 10 per cent of the average bill.

Commission chairwoman Paula Rebstock said pre-funding investment in the national grid could mean today's consumers paying disproportionately for investments that would benefit consumers "well into the future".

It could also limit the scope for alternative investments and transfer investment risk from Transpower to consumers.

The new Electricity Commission has to approve all Transpower's big investment plans, to ensure they are the most efficient way of spending money.

Transpower chief executive Ralph Craven said the 70-page Commerce Commission report would take time to digest and analyse so it would be inappropriate to comment on it.

Craven said Transpower believed the prices it charged its 46 customers - 35 electricity lines companies and 11 large industrial users - were justified.

"New Zealand has enjoyed strong economic growth, which has resulted in a significant increase in electricity demand," he said. "Transpower has needed to implement a series of crucial short-term investments to extract as much capacity as possible from the existing transmission system."

He said the state-owned enterprise hoped the outcome of the process would be "some much-needed clarity of this regulatory regime".

The commission's decision is the latest round in the long-running dispute between it and the Electricity Commission. Transpower feels it is caught between competing rules and regulations, while the commission cannot allow a major SOE to breach its rules with impunity.

Transpower will defend its method of financing investments, saying it has done this for the past five years.

At the heart of this dispute appears to be a fundamental disagreement over whether investment funds for the national grid should be gathered from the customers or from the shareholder - in this case the Government.

Submissions on the commission's proposed controls are due by February 27, with cross-submissions due by March 13. The commission said it would make a final decision on the issue and publish that decision by the end of next month.


What Transpower has done

* Increased its prices over the past three years in breach of Commerce Commission "price path" threshold regulations.
* Announced a 19 per cent price rise from April this year, followed by a 13 per cent rise in each of the next five years.
* Believes huge new investment is needed in the national power grid, which must be paid for somehow.

What the Commerce Commission says

* Transpower must be subject to the same regulation as all the other monopoly powerlines companies.
* Recent price increases were not justified and excess profits have been earned.
* The money that Transpower is gathering is not needed yet.
* Transpower will be limited from earning excess profits in the future, including an estimated $36 million in the 2006-07 year

What savings will come from price control

* Savings of between $117 million and $234 million, coming from reduced costs, through more efficient investment over the 2006-15 period.
* More efficient "timing of investments", resulting in savings of $31 million to $405 million.
* More appropriate timing of price increases and a lower cost of implementing investments.