$900m/yr of power dividends face regulatory pressure

Profits and dividends are also high for the big power generator/retailers. Photo by Lynn Greiveson.

The Government’s part-ownership of three of the country’s biggest electricity generators makes it a major beneficiary of the over-pricing in the retailer power market, industry executives and regulators heard on Thursday. Gavin Evans reports.

Electric Kiwi chief executive Luke Blincoe says improving the transparency of retail power pricing and what the major generators charge to supply their own retail arms would go a long way to improving the performance of the New Zealand market.

Speaking on a panel looking at market reforms in the UK, Australia and New Zealand, Blincoe said the remedies here shouldn’t have to be as “intrusive” as those being pursued in those countries.

And he observed that the Government, which initiated the retail price review now underway, is also a beneficiary of the current structure in which there is a potential $370 million benefit available if all consumers were paying the cheapest rates available in their area.

“The Government got has about 60 per cent market share in our industry as the owner of former state-owned enterprises. These are the same organisations that are knowingly perpetuating the cross-subsidisation,” he told about 70 executives at the event hosted by Auckland lines company Vector. He was referring to non-switchers who over-paid, while switchers paid a lower price.

“It’s pretty easy to resolve the short-term imbalance or cross-subsidisation that is taking place with some very simple measures from the regulatory point of view.”

The Crown owns just over half of Mercury NZ, Meridian Energy and Genesis Energy – three of the country’s four-largest generator-retailers – and received a matching share of the almost $900 million those companies paid out in dividends in the 2017 financial year.

Those dividends are likely to fall if the Labour-led Government tightens the rules on incumbent retailers, as is happening in the UK and has been recommended in Australia.
It has appointed a panel of experts to report back by April on the performance of the electricity sector, particularly whether pricing is fair around the country and for different industry and community segments.

Power prices up 48 percent

Delivered residential power prices have risen about 48 per cent in real terms since 2000, as gas prices rose and new power stations and transmission were built. Industrial prices, which closely reflect wholesale prices, have risen about 32 per cent in the same time, and remain less than half the residential average. Commercial prices have barely changed in real terms over the same period.

But the increases in residential and commercial prices have slowed markedly in the past four years, with average residential prices the past three years being below the peak reached in the March 2015 year. Excluding line charges, residential prices fell in four of the past five years, according to Government data.

Issues paper keenly awaited

Industry executives are expecting an issues paper from the panel in late September.

Blincoe was speaking on the panel with Professor Martin Cave , who in September becomes the chair of Ofgem, the electricity regulator in the UK, and economist Greg Houston, whose firm was a technical advisor to the recent electricity industry review undertaken by the Australian Competition and Consumer Commission (ACCC).

Ofgem will later this year set a price cap on the relatively expensive standard variable tariffs charged by the major power retailers there. The cap, in place until 2020, is intended to lower power prices for about 11 million consumers who don’t tend to switch supplier to get the best and latest deals. An earlier inquiry suggested homeowners were being over-charged by about £1.4 billion a year.

Default retail price recommended in Australia

The ACCC has also recommended the imposition of a “default” retail price to ensure customers not switching suppliers also pay a price closer to the actual cost of their power.
Cave, who is also meeting officials and ministers while in New Zealand, told the audience that the earlier inquiry he led was not surprised that customers not switching were not benefiting from better pricing. But the scale of the detriment in a market of 30 million households was.

Houston said the mechanics of retail competition had been a strong theme in the reviews in both Australia and the UK, and he said the New Zealand inquiry needed to look at the minutiae of those activities here.

“You need to focus on the very fine detail.”

'Saves and win-backs' a problem

Electric Kiwi is the largest of the country’s recent start-up retailers. The firm, not yet fours years old, offers a low-cost, digital-only model with a free hour of off-peak power daily. It supplied about 24,800 customers at the end of June, almost twice the number a year earlier, according to Electricity Authority data.

The company has been campaigning hard to get the Authority to block retailers for a period of up to two months from offering special offers in order to “win-back” departing customers.

Best 'secret prices' for switchers

Some major retailers are reversing up to half their potential account losses by offering generous credits and low rates to selected customers they wish to retain.

Blincoe told the gathering that the Authority could be acting now to make public those “secret prices” which only become available when a customer is ready to change supplier.

He said the problem is not a lack of competition in the retail market, but that the benefits of that competition are not more widely shared.

Forty per cent of the market has never switched in 15 years, and they tended to be the poorer, older, or less informed customers, or those with a poor credit history.

He says there’s enough data already in the public domain to suggest the New Zealand market is suffering exactly the same dynamics as shown in the UK and Australian reviews.

Best prices only go to nine percent of market

Under the current regime the major retailers are really only offering their best prices to about 9 per cent of the market annually.

“So no amount of consumer engagement proactively on their part is going to uncover those prices. The only way those prices get uncovered is when the consumer switches.”

The authority is considering submissions on the win-backs issue at the moment. Last year it also investigated whether generators were offering fixed-price variable volume contracts to commercial consumers at lower prices than were available through the futures market that the smaller retailers relay on.

It found about 12 per cent of a sample of contracts going back to 2013 had been offered at prices below those on the ASX, but no evidence of systematic under-pricing.

'Punitive prompt payment discounts'

Houston told the meeting that strong retail competition can’t exist without strong competition in the generation market. Cave noted that the UK inquiry had not found an issue with generation, given the deep, liquid forward markets new entrant retailers had access to.

The ACCC found the three biggest contributors to higher residential power prices in Australia during the past decade were loose controls on network investment, higher gas prices and reduced competition in the wholesale electricity market, and overly generous state subsidies for residential solar.

It was also highly critical of retailers’ use of prompt-payment discounts which prove punitive for those not meeting payment deadlines.

The commission made 56 recommendations to help lower costs to consumers, including the new lower cost ‘default’ retail offer, limiting advertising of discounts to unconditional offers only, improving protections for vulnerable customers and ensuring consumers have greater control of their usage data.

The ACCC believes improvements already occurring, coupled with its recommendations, could see residential power bills fall by more than 20 per cent by 2021. The average reduction, estimated at A$291 to A$419 depending on the state, would be driven by reduced network and generation costs, it forecast.