Power watchdog doubts bill's worth

Many lines companies support the legislation, with reservations. Others believe it doesn't go far enough. Photo / Brett Phibbs

The Government's proposals to rein in steep electricity price rises for domestic consumers won't work and may in fact have the opposite effect, says consumer advocate and Electricity Commission adviser Molly Melhuish.

Parliament's finance committee yesterday heard submissions on the Electricity Industry Bill, which is intended to address issues raised by last year's ministerial review, primarily that prices for residential customers have risen unjustifiably fast.

Mrs Melhuish, one of just two domestic consumer representatives on the Electricity Commission, presented a submission prepared by the Domestic Energy Users Network on behalf of various community groups including Grey Power and the RSA.

The submission referred to US economist Frank Wolak's study of the New Zealand electricity market which found generator-retailers or "gentailers" had extracted excess revenues of $4.3 billion between 2001 and 2007.

The Electricity Commission said that was "the most likely explanation" of higher prices for consumers.

Mrs Melhuish told the committee: "Companies described that as necessary to build new power stations or to give them confidence so that they can build and they say that not all the $4.3 billion is excess, but there's no mechanism for peer reviewing the issue of how much prices need to rise, and how much is pure gaming."

She supported the bill's improved industry monitoring which she believed was "absolutely essential" to deal with gaming or market manipulation by power companies.

But responding to a question from Labour MP Brendon Burns as to whether proposals in the bill would constrain price increases, Mrs Melhuish predicted the reverse. The bill's centrepiece, a real and virtual asset swap between the big state-owned gentailers, would only increase their opportunities to game or manipulate the market.

But Contact Energy representative Liz Kelly said her company viewed the bill as "a good opportunity to improve the electricity market and outcomes for customers and the economy". She said "prices must support the investment needed in new generation to ensure we do maintain security of supply".

Contact believed the next type of generation required to deliver that security was geothermal, which required higher prices to ensure the new generation was in place by 2012.

Ms Kelly estimated increases in the region of 4 to 5 per cent a year were needed.

Meridian Energy chief executive Tim Lusk said he believed the bill, including its asset swap provisions intended to improve competition, would improve competition and would mark "a paradigm shift in the performance of this market in the eyes of our customers".

However, Mighty River chief executive Doug Heffernan said the asset swap would increase Genesis's market power. He doubted it could be completed in the time frame suggested.

Auckland-based lines company Vector supported the bill, said chief executive Simon McKenzie. "However, we believe it doesn't go far enough to deliver on its key objective of maintaining downward pressure on retail electricity prices."

Vector saw the lack of a truly independent liquid hedge market as the biggest barrier for new retail entrants.

Other lines companies said the bill's measures to encourage competition by removing restrictions on their ability to enter the retail market would probably fail. Most cited the bill's thresholds for requiring operational separation of their lines business and any significant retail operation as being too onerous.