Editorial: Reining in power monopoly

Opinion

The Commerce Commission's ruling against the prices being charged by Transpower, the company that runs the national electricity grid, is a reminder that 20 years after New Zealand began to turn state utilities into commercial operations we still await fair and effective price control of natural monopoly networks. "Fair and effective" does not simply mean ensuring the service is as cheap as possible to the consumer. It also means ensuring the network earns and retains sufficient capital to maintain itself and expand to meet any increase in demand. When it comes to balancing those considerations the most effective price control is competition. Without it, line monopolies are always likely to be erring on one side or the other.

Transpower has been erring on the side of capital investment in the opinion of the Commerce Commission. The national grid operator has been charging electricity consumers for its future capital needs. In this way it has been acting less like a competitive business than a government department, which it was less than 20 years ago. No firm facing competition could afford to bump up its prices to finance in advance an increase in its capacity. It would raise the money, either by expanding its ownership or, more likely, borrowing. Either way, the costs would be borne by future consumers, provided of course the expected extra demand eventuated. And those who were asked to provide the capital, either as equity or loans, would take a hard look at the case for raising it.

That scrutiny is lacking when Transpower can take it upon itself to raise the capital from current consumers. The retail suppliers and large consumers who buy directly from Transpower have no choice but to pay its charges. There may not be much doubt that the grid needs additional investment. Bottlenecks at various points in the system have long created difficulties in its management and occasional disruptions to supply. The giant pylons that Transpower would like to install across the Waikato landscape may not be visually acceptable but there is not much argument that the supply lines to Auckland need greater capacity.

Nevertheless, it is in everyone's interest that Transpower should have to raise the finance in a way that invites some market scrutiny of its plans. Until the Commerce Commission intervened in December the grid operator intended to lift its charges by 19 per cent this year and 13 per cent in each of the next five years. It faced only the scrutiny of the recently established Electricity Commission for the investment it intended to make with the excess revenue those charges would rake in. The Electricity Commission was set up after two seasonal electricity shortages to deal with real or imagined under-investment in power generation. It would no doubt welcome any new investment in transmission, too, but the Electricity Commission does not bear the risk of any miscalculations.

That risk was being carried entirely by current consumers until the Commerce Commission stepped in. By imposing price control the commission estimates that it will benefit consumers by $700 million over the next five years, through avoiding excess charges and forcing Transpower to make more "efficient" investments. It will have to find its capital now either from its shareholder - the Government - or by borrowing. Ultimately the public will pay, either as taxpayers or electricity consumers, but better the latter. Consumers have a little more choice in the matter. They can use a little less power if it is overpriced. That's the risk that Transpower and its lenders should face. The Commerce Commission has probably ensured they will proceed with more care.