Electricity Authority proposes softer grid price reform

Tuesday 13th December 2016

The Electricity Authority is softening its proposed reforms for national grid payments and suggesting that even where its proposals raise power prices, other reforms under consideration by the Commerce Commission will mostly cancel them out.

However, even then, the contentious transmission pricing methodology (TPM) proposals would still raise power prices for several major industrial plants in the North Island after 2020, including New Zealand Steel, which continues to review the viability of its New Zealand operations, including the Glenbrook steel mill south of Auckland.

Where earlier versions of the proposed reforms threatened to deliver annual power price increases of several hundred dollars per household in some parts of the country, including the West Coast and the Far North, as well as large increases in Auckland, the latest proposals limit increases to no more than 3.5 percent of a customer's total energy bill in the first six years of the proposed new regime's operation, from 2020.

By then, the EA suggests the Commerce Commission is likely to have reduced the returns that monopoly owners of electricity networks can earn on their assets, largely offsetting the impacts of the TPM reforms, which are intended to ensure that regions that benefit from costly upgrades to the national grid also meet a fairer share of that cost. The upper North Island is the main beneficiary of around $2 billion of grid upgrades in the last few years.

The updated proposals were published today for a further round of consultation, following criticism from national grid operator Transpower that the proposals released in May were overly complex, and furious lobbying against increased charges led by the Auckland arm of Business New Zealand, the Employers and Manufacturers Association.

A key point of friction has been the cost of transmission for Pacific Aluminium's smelter, at Tiwai Point at the bottom of the South Island. The Rio Tinto-controlled smelter has made clear that its continued operation in New Zealand partly rests on making substantial savings on its current transmission costs.

"The smelter's charges have increased from $44 million to more than $60 million in the past seven years," the EA says in questions and answers published with today's materials on a reform process that is almost as old as the wholesale electricity market, which was established in 1996. "The great majority of this increase is to pay for new transmission in the upper North Island that delivers very little additional service to the smelter.

"The smelter's action have not imposed costs which led to these investments."

As result, Tiwai Point, as well as Invercargill households, would see their transmission costs fall.

The EA said the proposals were "not about pitting any region against another".

"It's about making sure the people who benefit from investments in the grid are the ones that pay for them."

It suggests there will be a happy coincidence between the date its proposals would kick in, from 2020, and a presumed reduction by the Commerce Commission in the weighted average cost of capital (WACC) that regulated monopoly electricity network owners would be allowed to earn from 2020 onwards. EA modelling estimates 28 of the country's 29 network areas would see lower electricity grid and lines charges than they face today, with only Electricity Ashburton facing higher charges.

Likewise, instead of just three of the country's 12 largest industrial electricity users facing lower network charges based solely on the EA's proposals, it estimates that seven of the 12 would see lower charges when combined with a lower WACC. The largest beneficiaries would be pulp and paper makers Oji Fibre, timber processor Juken Nissho, and the Tiwai Point smelter.

NZ Steel, KiwiRail, pulp and paper maker Norske Skog, and forestry processor Rayonier would face increases capped at the 3.5 percent level.

The EA proposals remove a previous proposal giving the national grid operator, Transpower, discretion to apply "prudent discounts" in cases where grid price rises caused an industry to cease operation in New Zealand. It also rejected Transpower's proposal to take a staged approach to the TPM reforms.

However, the latest proposals would give Transpower greater discretion in how the charges are designed region by region.

Two refinements from the proposals published in May would further reduce the impact on households in the politically sensitive and economically underdeveloped Northland region, the EA said, with the impacts ranging from a reduction of $64 and an increase of $40 a year, depending on the Commerce Commission's WACC decisions from April 2020.

Consultation on the refinements published today closes on Feb. 24 next year.

BusinessDesk.co.nz

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