Big electricity players to prey on low-income households

Dr Geoff Bertram says the oligarchs of the electricity industry have moved quickly to capture the new Government's Minister of Energy, Megan Woods.

In her speech to the industry's Downstream conference on March 13, as reported by Businessdesk, Minister of Energy, Megan Woods faithfully parrotted key themes from a Concept Consulting report written for the Electricity Networks Association last November, and assiduously pushed at the incoming Government by industry lobbyists.

"The Government," the minister declared, "is watching to make sure low-income consumers don't end up facing higher electricity costs caused by wealthier people installing solar power units."

"This is particularly in the context of the rise of emerging technologies like solar panels and distributed generation which mean that more people who can afford to are able to draw less electricity from the grid, pushing the price of electricity up for everyone else – often the people who are least able to afford it."

Here in a nutshell is the industry's strategy for blocking the entry of rooftop solar and preventing customers from breaking free of the incumbent electricity cartel's price-gouging.

The threat is that when households who can afford to install their own solar generation and batteries do so (and thereby reduce their purchases of cartel-supplied power), the industry will respond by raising the prices it charges low-income households who can't afford to make the switch to independent renewable supply.

"Nice little bunch of low-income folks you have there. Pity if something were to happen to them …"

The protection-racket line comes straight from the Godfather movies. It is plausible because the industry does indeed have the ability, and the legal right, to carry out the threat. The Government, unwilling to face down the oligarchs, seems likely to cave in to their demands.

When new renewable technologies such as rooftop solar come into the market and provide serious competition to the established generators and lines networks, those existing players see their profits threatened.

A summary of the electricity debate

For those lacking the time or inclination to plod through the detail of the debate, here is a quick summary. When new renewable technologies such as rooftop solar come into the market and provide serious competition to the established generators and lines networks, those existing players see their profits threatened. To protect those profits they must either kill off the new technologies, or extract more money from their remaining customers, or both.

If the attempt to protect profits fails, the big companies face write-downs on their asset values and share prices – which would, of course, be the normal and expected outcome in competitive industries subject to market forces.

The New Zealand electricity industry is not, however, a competitive industry subject to market forces. The production and retailing of electricity is done by a tight oligopoly of five big companies, while distribution of power takes place through natural-monopoly networks whose prices and asset values are protected by a compliant Commerce Commission.

Over the three decades of so-called "reform" the big players have written into their balance sheets over $14 billion of "revaluations" – pure capital gains, representing the value of wealth extracted from electricity consumers via the industry's successful rent-seeking.

Those huge wealth transfers, and the price-gouging of captive customers to sustain them, are directly threatened by the arrival of independent supply based on economically viable renewables technology. Faced with the reality, rather than just the mirage, of real choice for consumers, the industry has rushed to hide behind the skirts of the Commerce Commission and the Government.

The network companies declare that their asset values are "sacrosanct" because they are enshrined as a Regulatory Asset Base signed off by the Commerce Commission. Therefore, they say, they are required to secure enough revenue to get their regulated rate of return on those assets – which amounts to saying that their regulator-approved revenue is their "cost of supply".

To guarantee recovery of this revenue the simplest procedure is to impose high fixed charges on customers, forcing them to pay for the full "cost" of having electricity delivered to them.

Consumer protections dumped

A previous Labour government gave some relief from this burden for low-income households by bringing in the Low User Fixed Charges Regulations, which have enabled low-income households to reduce their power bills by cutting back their use of electricity, and have thereby provided at least a shred of consumer protection for large numbers of the most vulnerable.

These regulations, Minister Woods has now signalled, are to be dumped overboard to clear the way for the industry to increase its squeeze on the poor. Recognising that will probably leave more and more poor households unable to pay, and so cut off from supply, the industry's solution is for taxpayers to subsidise electricity purchases by the poor, thereby underwriting the electricity industry's profits in the same way as the Accommodation Supplement has enabled landlords to hold up rents.

Woods duly refers to "the wider context of supporting New Zealanders to afford their energy bills".

We are, in short, a long way from 2013, when the Labour and the Green parties announced plans to force the electricity industry's prices and asset values down. The next round of price hikes is on its way, underwritten by Government policy and the law of the land (blame Parliament for that), and enforced by the debt collectors.

A real commitment to reducing poverty in this country could usefully start by tackling directly the landlords, loan sharks, and electricity companies that prey on the meagre household budgets of the poor.