David Parker
Spokesperson for Finance

5 June 2013

Comment on Electricity Authority critique in the name of Dr Layton

Dr Layton’s speech today was about justifying the status quo. After two decades of electricity price rises at twice the rate of inflation, it can and should be challenged.

Some of the problems I have with his analysis are:

1. The tone of Dr Layton’s critique is clear from the start when he sets up a straw man alternative. He says that a move to a pay-as-bid market would result in changed bidding behaviour. Virtually everyone knows that. I don’t know who he thinks is proposing that. Labour certainly isn’t and as far as I am aware the people he has named in his paper are not either.

2. The discussion of the value of water from paragraph 16 to 22 is misguided. It confuses the free use of the public water resource with the timing of its use.

Dr Layton implies that under any other system water will not be used at the appropriate time, or will be wasted, which is incorrect. There should be a sensible priority dispatch order and some water should be stored to meet peak demand. This, of course, varies depending upon hydrology. Risks that exist in both systems does not mean the current system is best.

The issue of free use of the public water resource (as opposed to the efficient timing of the use of that water) is not properly addressed by Dr Layton.

This is a glaring omission in his critique, and shows the weakness of his arguments for the status quo.

3. Dr Layton says Professor Wolak’s finding of billions of dollars of overcharging was incorrect. It has been reported that Professor Wolak – a world renowned expert from Stanford University - was not even accorded the decency of being given the opportunity of replying to the critiques of his work. This is shoddy practice to say the least.

Dr Layton was involved in setting up the current market as Chair of the New Zealand Electricity Market rules committee. The glaring failures in the regulation associated with the break-up of ECNZ and the switch to the current market were many. This has cost consumers billions of dollars over the past two decades. Some of the mistakes have been reversed while others are still being suffered today. These mistakes include the lack of regulation of monopoly local lines companies; the ridiculous arrangement that Transpower could only invest in upgrades if their gentailer clients agreed to pay the cost (which required them all to agree where and when, which of course they never did); the failure to prevent the vertical integration of generators and retailers; and the capitalisation of free public water into the value of old hydro plants.

4. Dr Layton acknowledges that it is possible to move to a regulated price based on the historic cost to the generators of their assets (rather than the gentailers own revaluations), but then says that it would be usual to adopt “the current cost” as the opening regulated value. He seems to assert that current revalued book valuations should be seen as “the current cost”. Applying this logic, the regulated price for Telecom should have been based on Telecom’s own inflated valuations of assets. He cites that lines companies were allowed to do this, but that is a poor precedent and has been subject to criticism.

5. Dr Layton says “removing past windfall gains” would result in a transfer of wealth from existing generators to consumers. What does he mean? The excessive charges to consumers in yesteryear are not reversed. But future charges and asset values based on excessive charges are not protected, and neither should they be. The status quo advanced by Dr Layton protects excessive future charges and company revaluations at the cost of consumers.

6. Dr Layton claims under a single-buyer model the sky will fall in and investors will catch a chill. I have no doubt investors will invest in long term contracts for new supply. I have already been approached by investors who have said they look forward to doing so, and who believe this will drive down costs. Investors will make rational decisions, as they do in telecommunications, electricity lines, and in overseas generation markets.

7. Dr Layton says that with good generation margins currently, now is the wrong time to change. This is another error by Dr Layton. He should know while there is uncertainty during the process of change (not after) it can only be made when there is a buffer in generation margins. This was the advice from MED in 2007, when Labour considered whether to dump the failed model inflicted upon NZ over the last two decades.

8. Dr Layton crafts arguments about some implicit but undefined regulatory bargain when ECNZ was split up. This is grasping at straws. You would think what is proposed will not pay production costs plus a fair return on capital, when it actually does. You would think new generation choices were being regulated rather than efficiently exposed by competitive tender. You would think that retail competition is being curtailed, when it is being encouraged.

“I am not surprised that Dr Layton holds a different view from Labour. He has been one of those intimately involved in the current market for over a decade. In my opinion he is wrong.

“Under Labour’s NZ Power policy, power bills will come down between $230 and $330 a year for the average household, by between 5% and 7% for industry, and future increases will be more moderate and predictable.”

ENDS

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