Why power prices are rising and what to do about it
This blog post is taken from a paper presented by Molly Melhuish on 18 March 2011, for Grey Power and Domestic Energy Users’ Network
SUMMARY: NEW ZEALANDERS SHOULD STOP POWER PRICE RISES
Market pricing of electricity began in 1991, and domestic power prices have risen faster than inflation, ever since.
Prices will rise even faster under the Electricity Industry Act 2010, which creates new excuses for price hikes. It entrenches in law the view that monopolistic profit-maximising is economically efficient.
Unless the law is repealed, New Zealand’s state owned power companies will be increasingly attractive to investors as they find new excuses to hike prices. Even part-privatisation would lock in the principle of profit-maximising. Domestic consumers would be the losers – and not only from price hikes. Affordable, sustainable energy options such as solar energy and efficient wood burning compete poorly in today’s electricity markets. The Act will further support the present trend towards all-electric houses – the monopolists’ dream.
REPEAL THE ELECTRICITY INDUSTRY ACT
And replace it by genuine consumer protection
The Labour-led government in 2000 moved to add the objectives “fair” and “sustainable” to electricity legislation, and to “put downward pressure on prices”. These objectives were totally ignored by the regulator, the Electricity Commission.
It took a decade of submissions to break through the vast defences of regulatory language and economic jargon, to show that monopolistic power companies were in fact maximizing their profits at every possible opportunity. A Commerce Commission study by Professor Frank Wolak concluced that generator-retailers had overcharged consumers by $4.3 billion between 2001 and 2007. The Commerce Commission said that was completely legal – and cancelled the second part of the study, on retail profiteering.
The new Electricity Industry Act confirms the original purpose of market pricing – to protect the interests of industry investors. And the new Electricity Authority has interpreted the Act in an even more extreme form. Its foundation documents set out principles which exclude any consideration of the interests of domestic consumers:
Amendments to the Code can substantially affect industry participants, and...
unpredictable and ill-founded amendments can undermine investor confidence . The primary purpose of the principles is to provide industry participants with greater predictability about decision-making on likely amendments to the Code, to maximise investor certainty.
These documents require the Authority’s decsions to be based on formal cost-benefit analyses that treat household and large commercial consumers as a single interest group. Their economic model is pure neo-liberal, using “Ramsey Pricing” to maximize revenues from captive consumers. This, like Maggie Thatcher’s poll tax, is perfectly “efficient”, and perfectly unfair.
The language of the foundation documents, and of statements about power prices by industry and Government, is pure regulatory doublespeak:
- There is no cross-subsidy when domestic and other small consumers pay monopoly prices while industrial consumers bargain for the lowest possible prices.
- What Professor Wolak calls “overcharging”, and others call price-gouging, fits the Authority’s criteria for “long-term benefit of consumers”.
- “Downward pressure on prices” means prices rising fast - but not as fast as they “otherwise would have”.
Grey Power rejects the self-serving regulatory gamesmanship of the past two decades.
We call for an immediate halt to unfair price gouging, by interpreting the present Act to recognize the difference between domestic and industrial consumers.
We call for new regulation to protect consumers instead of investors.
Investor-friendly regulation is the precursor to privatization, and we absolutely reject privatisation of publicly owned electricity and other energy assets.