Price extortion

Management inadequacies have been one of the features of the Clark Government in its leadership of the administration of public services and the guidance of enterprises whose activities have a crucial impact on our daily lives.

One of the most obvious of these has been the failure, over most of the period from 1999, to put together as a matter of high priority a comprehensive energy plan for present and predicted demand and ensure it can be met with appropriate infrastructure.

The faulty Bradford reforms of the electricity sector were supposed to deliver competition (to the advantage of consumers) and security of supply and delivery.

Here in the South none of these goals have been met to the expectation of consumers.

Worse, the present Government has been so slow to respond to the urgent need for progress on infrastructure improvement that consumers here, in particular, now face years of exorbitant price increases.

There is profiteering involved, and the need which has been obvious for years to separate generators of electricity from retailers should by now be dawning on the Government.

The self-serving Clark Government statement last week, that Contact Energy's "alarming" 10%-12% planned price increases for its Dunedin consumers could not be justified, underlines the inadequacy of the response to energy supply and pricing issues.

It has failed to come to the rescue of consumers because to do so would require substantial changes to parts of the post-Bradford "the market will determine" system.

The international investment rating agency Standard and Poor put it rather more obviously in June, noting low hydro lake levels and high wholesale electricity prices at the time would not hurt power company profits, because they were passing their extra costs on to customers.

This at a time when there was much hysterical talk of another power crisis - rightly denied by the Government - due to low lake levels.

Hydro generation creates about two-thirds of New Zealand's electricity, and most of that is in the South.

There was no power crisis this winter, with lake levels well above those in 1992 when there was a genuine crisis.

Demand, however, was considerably higher: it is colder in the South in winter, there are far more heat pumps in houses, and dairy farming is a large user of electricity.

The equivalent of about 20% of South Island power usage was being sent from the North Island over the Cook Strait link in mid-winter.

Yet there is quite enough electricity being generated in the South Island to meet South Island demand, including that of the Tiwai Point aluminium smelter, which uses about 15% of total national output, and the smelter has converted one of its potlines to go offline if needed, so providing nearly another 150MW of reserve capacity.

Contact, however, claims the reasons for its higher Dunedin prices are the extra cost of supplying power during the winter, increased "transmission risk", meaning the failure to improve and increase capacity on the Cook Strait link, and "chronic under-investment" in the national power transmission system.

It also claims that if the link failed, the South Island would face severe consequences, which is an assumption needing proper analysis, and that more generating capacity needs to be built in the South.

But why should consumers believe Contact's arguments when the hydro lakes are almost back to average levels for the time of year and wholesale market prices have dropped markedly?

This is also the same company which said an increase of at least 6% was likely a month ago, when it announced its $237 million annual profit, and which this month said it had plans to almost double its directors' fees.

If Contact lost money during the winter because of poor management decisions, or unpredicted dry-year risk, such factors are surely balanced by the good years.

Consumer New Zealand chief executive Sue Chetwin has described Contact as being "up there with the most rapacious" power companies, and few in Dunedin would disagree.

But Contact is not alone.

All the power retailers who are also generators have increased prices substantially.

Nationally, household power prices have increased by an estimated 66% on average since 1999, when the Clark Government was elected, which is a rate way ahead of the rate of inflation.

It has also been estimated the poorest 10% of the population was last year paying 12.5% of their income on energy, and in the South the proportion of income to cost likely is much greater.

The Government has said at long last that it intends to ensure the market is not being manipulated by electricity retailers.

How could it be otherwise, though, when market power is not restrained by genuine competition? The Commerce Commission and the Electricity Commission are investigating the adequacy of competition but that is a task that should have been assigned years ago and may have prevented power companies ratcheting up domestic prices so as to improve revenues for their shareholders.

Pricing should fairly reflect real costs, not market power.