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Electricity regulator lays into sector critics' inadequate research

Wednesday 5th June 2013

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The chairman of the Electricity Authority has let rip at the critics of current electricity market arrangements, singling out three individuals for leading the charge that has produced the Labour and Green parties' central buyer electricity system.

In a 28 page paper delivered to an industry audience in Auckland, Dr Brent Layton argues current arrangements are working well but can be better, and that returning to a central planning approach will lead to higher prices and more likelihood of power shortages.

"Conclusions based on inadequate research are not a basis for sound economic policy," said Layton, in a direct attack on Victoria University Institute of Policy Studies economist Dr Geoff Bertram, whom he accuses of producing graphs that overstate the extent of household power price increases relative to other countries.

New Zealand's residential electricity prices had been "very low" in the 1970's and 1980's relative to other countries and were "now in the middle of the pack", at odds with a widely republished graph produced by Bertram apparently showing a much steeper rise in New Zealand relative to others.

Also in Layton's sights are long-time energy campaigner Molly Melhuish and a one-time New Zealand Electricity Department planner and energy industry consultant, Bryan Leyland.

"The criticisms of Mrs Melhuish, Mr Leyland and Dr Bertram require a fuller response," Layton says in the paper, "The Economics of Electricity."

Layton also says he would not implement the Labour-Greens' NZ Power proposal because it would contravene the requirements of the regulator's legislation "to promote competition in, reliable supply by, and the efficient operation of the electricity industry for the long term benefit of consumers."

Asked whether he would be able to serve on the Electricity Authority if a Labour-Green government were elected, Layton said: "I personally wouldn't."

But he was coy under questioning about whether the paper was a direct rebuttal of the NZ Power central buyer policy promoted by the Labour and Green parties.

On central buyer proposals, he said similar policies had been examined four times in the last 25 years and "found wanting in terms of what would be of long term benefit to consumers.

He asserts that consumers could expect household reductions of around $200 in their annual power bills if current approaches to encouraging retail market competition are pursued.

He rejects the use of a 2009 study for the Commerce Commission by an American electricity academic, Professor Frank Wolak, to claim electricity industry "super-profits" of some $650 million a year had been amassed by electricity generators using market power to jack up wholesale electricity prices.

"The Wolak research is contrary to more credible evidence," said Layton. "There is no capacity to extract from the wholesale market a half billion dollars or more a year of super profits. Nor are there material super profits falling to generators by any other means."

With five major players and dozens of smaller generators, the electricity sector had more competitors than supermarkets or petrol stations.

To achieve Wolak's outcome would require wiping out some $7 billion of the value of today's power companies, with the likelihood of a "chilling effect on investment New Zealand" which would be "large, widespread, and long lived."

"The centralised decision maker arrangement could be introduced without widespread expropriation but it would be less efficient than the current arrangements."

Investors would be less willing to put capital into new electricity generation, would demand higher prices earlier from any investment they did make to ensure adequate returns, and there would be greater risks of power shortages.

Layton also dismissed the argument that hydro-electricity producers should not be putting a value on water since they used it for free.

Using droughts as an example, he said "water has significant economic value and the deeper the drought higher the value is likely to be."

"The costs to society of running out of electricity in terms of discomfort and lost production are very high."

Layton was the chief architect of electricity industry reforms under then Energy Minister Gerry Brownlee in 2009 and says they have had a marked effect on electricity market competition, with more initiatives to come to spur competition amongst retailers.

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