Hive News Wednesday: Govt faces political heat on electricity reshuffle; Dairy prices rise

Power pylons above the Hutt Valley. Copyright Lynn Grieveson / Hive News

The Electricity Authority (EA) softened the harder edges of its transmission pricing proposal yesterday, but the Government still faces political fallout from a plan that would increase power prices in Northland, Auckland and Westland, but deliver over NZ$77 million in benefits to Meridian Energy and NZ Aluminium Smelters (NZAS).

New Zealand First and the Greens criticised the plan to remove cross-subsidies as penalising those in remote areas who could least afford it and handing most of the benefits over to big businesses. Vector also attacked the plan as unfair and Grey Power said it would worsen energy poverty.

The plan plays right into the hands of New Zealand First's targeted areas of struggling provinces and older voters on fixed incomes, adding to its momentum of recent months as voters focus more on migration and regional economic issues.

The biggest individual losers are in Ashburton, where consumers face a 5% or NZ$102/year increase in their power bills through Electricity Ashburton, while the Vector network's customers in Auckland will see their bills rise NZ$58/year or 3.4%. Westpower's bills will rise NZ$49 or 2.7% per year, while Northpower bills will rise NZ$36 or 2.3%.

There are individual winners too, including Electricity Invercargill's customers with a NZ$64/year or 3.4% reduction, and Eastland's customers, who will see a 4.5% or NZ$79/year reduction. Wellington and Christchurch consumers will see their bills fall 2.1% and 2.3% respectively.

The biggest corporate winners were NZAS with a NZ$20.8 million benefit and Meridian Energy with a NZ$57 million benefit, although the Smelter owner's windfall was less than the NZ$50 million predicted in an earlier version of the proposal. Contact wins NZ$16 million, while Genesis and Trustpower will receive an extra NZ$1 million each.

Shareholders celebrated, with Meridian's shares rising 3.6% to a record high NZ$2.82/share and Contact shares firming 1.1% to a one-year high of NZ$5.35. The moves helped power the NZX50 to fresh record highs.

The proposal essentially forces customers with the most scattered networks who are furthest away from the Southern Lakes to pay more for their transmission costs after the recent upgrades to the Cook Strait HVDC link and the core grid strengthening in the North Island, while those closest to the lakes hydro schemes (Meridian, Invercargill and the Tiwai Point smelter) benefit from the removal of the cross-subsidy.

EA attacked

New Zealand First Commerce Spokesman Fletcher Tabuteau attacked the plan and targeted the salaries of the executives of the big power firms and the EA in particular.

"These are the people who have decided Northlanders and West Coasters, and some in Auckland, the Waikato and Eastern Bay of Plenty can handle an increase in power bills. We say this is a further attack on ordinary Kiwis, and we call for fairness across the country," Tabuteau said.

"We are all Kiwis, our forebears built the power stations, and we should all reap the benefits. Privatisation, the drive for profits and big salaries have ripped equality out of the power industry," he said.

Green Energy Spokesman Gareth Hughes said the proposals would force some households to pay more for power to subsidise big business users and make it even harder for families to warm their homes in winter.

“The fact is, higher power prices make for colder families and sicker children in winter,” Hughes said.

“The Electricity Authority should be treating the electricity network as a national asset for the benefit of all New Zealanders, not playing people who live in different regions off against each other while cutting the Tiwai Point aluminium smelter’s power bill by $20 million," he said.

“Allowing major industrial users more scope to ask for special discounts, which households will have to subsidise, is blatantly pitting the interests of big businesses against families having warm homes in the winter. Parts of the Electricity Authority’s document read like people will just up and move their lives around the country to maximise economic efficiency in the power grid, which is ridiculous."

Vector's largest shareholder, the Auckland Electricity Consumer Trust, said the plan wasn't fair or right. It said the plan would increase Aucklanders electricity costs by NZ$78 million, while generators would benefit by NZ$70 million, and it questioned whether generators would pass the benefits on in the form of price reductions.

"Auckland families, the elderly and small business owners who are at the heart of Auckland’s economic engine room, will all be paying higher electricity prices which will increase the profits of electricity generators and foreign owned large industrial companies," said AECT chairman William Cairns.

'Overall impact fairly modest'

Meanwhile, EA CEO Carl Hansen defended the plan, arguing it would improve efficiency and send the right pricing signals to electricity consumers.

The EA said the current Transmission Pricing Methodology (TPM) was complex and sent the wrong signal to power users.

NZAS, Meridian and the Major Electricity Users Group had lobbied for changes to the existing system, arguing they overpaid for improvements to the national grid in ways that benefited the North Island and other remote areas in ways those regions hadn't paid for. The changes in the transmission pricing regime were seen as crucial to the future of the Tiwai Point smelter.

"The current TPM encourages wasteful use of the transmission grid, and investment in transmission and generation assets that is not in the best interests of electricity consumers and the New Zealand economy. The economic cost to New Zealand exceeds NZ$200 million," Hansen said.

"If no change is made, in the future consumers could pay hundreds of millions of dollars more for electricity than necessary," he said.

The EA proposes replacing the TPM and Distributed Generation charges with an ‘area-of-benefit’ charge, which would allocate the cost of a transmission investment to generators, distributors and industrial consumers located in areas of the country that benefited from the investment. A ‘residual’ charge would cover Transpower’s overhead costs and the cost of any grid assets not recovered by the area-of-benefit or other transmission charges. The residual charge would apply to distributors and industrial consumers only.

“Over time the proposal will reduce costs in the electricity industry and reduce prices for consumers from what they would otherwise be. The immediate overall impact of the proposal on the average residential electricity bill is fairly modest. In 15 regions, electricity consumers’ bills will decrease. In the remaining 14 regions, the average bill increase is less than NZ$50 per year," Hansen said.

“The regions where consumers will see an increase in their bills are those that have benefited from substantial recent grid upgrades to improve service levels, or where transmission prices have been lower than average. In every region, the benefit from these recent investments greatly exceeds the area-of-benefit charges proposed to pay for them," he said.

“Under the current TPM consumers that have had little or no benefit from these investments have faced higher costs of electricity to pay for them. Not surprisingly, this has made the current TPM contentious. The Authority believes that after an initial settling-in period, the new approach will improve the acceptability and durability of the TPM.”

Hansen said the EA believed consumers were paying distributed generators between NZ$25 million and NZ$35 million each year which they are not receiving any benefit in terms of reduced transmission costs. The EA estimated its proposal would mean consumers paid up to NZ$325 million less in charges than would otherwise occur over the first 15 years.

If adopted, the changes would be phased in beginning 1 April 2017 and the changes would be phased in by April 2019.

In other economic and financial news...

Prices rose 2.6% overall in the latest fortnightly Globaldairytrade auction overnight, including a slightly-bigger-than-expected 3.0% rise in wholemilk powder. This was the fourth increase in the last six auctions and lifted the GDT Price Index to its highest level since January 19. The index has risen 7.3% since hitting a seven month low on March 15.

AgriHQ set its 2016/17 payout forecast at NZ$4.74/kg, up from an unchanged forecast for the just-ending 2015/16 year of NZ$4.11/kg. These are both above the Fonterra forecast for 2015/16 of NZ$3.90/kg. Fonterra has yet to set its forecast for 2016/17, but most economists are picking a payout of around NZ$4.50/kg, which would would mean a third consecutive year of payouts below break-even levels of around NZ$5.30/kg. Fonterra's new forecast is due by the end of May.

The Reserve Bank's survey of inflation expectations in the June quarter found the key two-year-ahead expectation measure was virtually unchanged at 1.64%. This measure fell unexpectedly to 1.63% in the March quarter from 1.85% in the December quarter and was seen as a factor prompting the Reserve Bank's surprise rate cut on March 10. Expectations for one-year-ahead inflation rose to 1.22% in the June quarter from 1.09% in the March quarter, but economists said the changes would not be enough to change the Reserve Bank's track, either to make a June 9 cut more of a certainty, or less likely.

In more pre-Budget news, Steven Joyce and Jonathan Coleman announced an extra NZ$97 million in health research spending over the next four years.

ANZ reported withdrawals from its KiwiSaver scheme by over 8,000 first home buyer customers more than doubled to NZ$148 million in the year to March as use of the Government's KiwiSaver HomeStart subsidy scheme ramped up.

Have a great day

cheers

Bernard