Electricity prices

Despite another round of electricity price hikes this year, Energy and Resources Minister Simon Bridges remains determinedly optimistic. He’s declared the electricity market to be “more competitive than it has ever been” and boasted the government has halved the steep price increases seen under the previous administration.

While the pace of price rises has slowed, rates continue to outstrip inflation and push-up the cost of living. So how much faith can we put in assurances the electricity market is working for consumers? We look at the claims and the evidence:

Claim: It's a competitive market

The Electricity Authority’s annual review paints a picture of a flourishing market where new entrants are winning customers from the old guard and consumers are being deluged with cash discounts and other deals.

It’s true there are now more players but their inroads have so far been small. Despite regional changes in customer numbers, the overall market share of the incumbents isn’t much different from what it was in 2010 when the last round of industry reforms started to kick in.

The authority’s data show 93 percent of the market remains in the hands of the big five: Genesis, Contact, Mighty River Power, Meridian and Trustpower. Genesis – the largest retailer – Meridian and Trustpower have all increased their customer numbers since 2010.

Only Contact has suffered more than a 1.5 percent drop in market share – a slide that dates back to at least 2008 when the company drew flak over plans to increase its directors’ fees.

Among the smaller operators, Todd Energy (owner of the Nova brand) and Pulse Energy have had the most success at winning new customers. But they remain minnows, holding 3 percent and 2 percent of the market respectively.

King Country Energy, majority-owned by Todd, has lost customers since 2010.

The rest of the market – under 5000 connections – is spread thinly among a handful of newer entrants with limited geographical reach. Of those advertising residential tariffs, Hunet Energy operates only in the Auckland region; Opunake Hydro mainly in Taranaki; and Payless Energy in Dunedin and Central Otago.

You’d get long odds that these companies present a major threat to the dominance of the big five, which are backed by significant generation assets that help insulate them from market fluctuations.

Claim: Attractive deals are on offer

The inroads made by smaller players haven’t been enough to hold prices steady, let alone force a drop – something consumers might reasonably expect in a genuinely competitive market when demand is flat and wholesale electricity rates have fallen.

Last year, the Electricity Authority reasoned that weak demand coupled with a sharp drop in rates on the futures market raised “some prospect of flat or declining retail prices”. That never happened. Statistics NZ figures show electricity prices rose 3 percent in 2013, nearly double the 1.6 percent rate of inflation.

This year, the authority has suggested official statistics may be overstating price rises because they don’t capture the discounts companies are being forced to offer to attract and retain customers. The authority believes some of the best deals may be offered via door-to-door selling (see "Marketing tactics" below).

There’s anecdotal evidence that retailers may be more prepared to offer sweeteners to keep customers as electricity demand ebbs. But these sweeteners aren’t necessarily available to everyone. Customers who are high users and good payers are more likely to be given preferential treatment.

For households struggling to pay their power bill, discounts are unlikely. Exercising any choice in the market is becoming more difficult for these customers as retailers take a harder line with late payers. Last year, 41,085 households had their power disconnected for failing to pay their bills.

Electricity companies have no obligation to supply – and they can refuse to reconnect customers they judge to be a credit risk. To get back on the grid, the only option for these households may be to go on to a pre-pay meter and accept a more restricted electricity service.

Claim: Companies are only passing on costs

This year’s price increases have been accompanied by the usual finger-pointing by electricity retailers and lines companies over who’s to blame. While both have claimed they’re only passing on increases in operating costs, Statistics NZ’s Producer Price Index shows input costs in the sector have fallen in the last two years.

Despite the system being flush with regulators, price transparency remains elusive.

Lines companies and grid-operator Transpower are subject to price and information disclosure regulation. But the Commerce Commission stated last year that it's not yet possible – because of gaps in disclosure requirements – “to draw any firm conclusions” about whether lines companies are operating and investing efficiently.

Analysis by the commission has shown lines companies' revenue has increased at a faster rate than expenditure. Between 2008 and 2011, revenue from line charges increased by 2.6 percent a year while total spending rose 1.8 percent. "Non-network" expenditure also increased at a faster rate than network expenditure.

Data released last year under revised disclosure requirements indicate 22 out of 29 lines companies are forecasting continued growth in their expenditure. Fifteen companies are forecasting an average rise of more than 10 percent a year out to 2018.

According to figures published by the Ministry of Business, Innovation and Employment, lines companies were responsible for around 25 percent of the increase in average residential bills last year. However, electricity retailers can take the blame for over two-thirds of the rise.

Despite claims their costs are increasing, electricity retailers have been doing all right (see the pre-tax earnings table below). Four of the big five retailers recorded a marked jump in pre-tax earnings between 2010 and 2013.

Contact ended 2013 with pre-tax earnings of $541m, up from $427m in 2010. Genesis, Mighty River Power and Trustpower also increased their earnings over the same period.

Meridian is the only company to record a drop, partly attributed to the loss of revenue from its Tekapo power stations which were transferred to Genesis in 2011.

The Electricity Authority announced in March it was investigating companies’ justifications for this year’s round of price rises. Initial results of the investigation are expected to be released in June 2014.

Market performance

Debate about the performance of the electricity market continues to shed more heat than light.

Successive reforms have been justified on the grounds that a market where companies vie for customers will keep down prices. But prices continue to rise. Domestic consumers, responsible for only a third of total electricity use, have shouldered the burden.

Since 2000, electricity prices have risen by 46 percent in real terms. The most significant impact has been on low-income households which now have to spend a larger proportion of their income to keep the lights on. Last year, the lowest-income households spent 10 percent of their income on energy while the highest-income households spent one percent.

With further increases in the pipeline, bills will be going up again this winter.

Our view

• Despite over two decades of reform, consumers are yet to get reliable assurances that the market model is supplying electricity at a reasonable price.
• Legislation has failed to ensure adequate price transparency, leaving regulators struggling to gauge whether prices are fair.
• With more households struggling to pay their bills, electricity regulations need to be reviewed to protect the interests of vulnerable consumers.

Report by Jessica Wilson.