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14/9/2018 — General
Industry has little to worry about
By Dene Mackenzie

The electricity sector has little to worry about from the first report of the Electricity Price Review, according to Forsyth Barr broker Damian Foster.

The report released on Tuesday by Energy and Resources Minister Megan Woods was the first stage of the price review. The second stage would consider potential solutions to the issues raised in the report.

Overall, the report endorsed the view the sector was performing well. The recommendations were likely to be tweaks to the existing system, as oppose to significant changes, he said.

“That said, there will be lots of recommended changes which may give an impression the sector is performing poorly.

“In reality, the changes will have minimal impact on sector earnings, and may help if the recommendations reduce costs, and will only impact on who pays.”

The key risk from any regulatory review was for an industry to be found to be earning excess profits. On that matter, the review said it had found no evidence to indicate generator-retailer profits were excessive, Foster said.

Residential prices had risen quickly due to a distribution charges cross-subsidisation in favour of households being unwound, the increased cost of thermal generation and GST increases.

A possible solution was increasing distribution costs to businesses and reducing charges to residents.

The report noted prompt payment discounts could be as much as 26% and hurt those who could not pay, effectively a disproportionate penalty for late payment, he said.

“We note several retailers are considering ditching prompt payment discounts and we expect the issue to ease over the coming month.”

A two-tier retail market had developed in New Zealand. Foster said the issue had led to price caps in the United Kingdom and a suggested price cap in Australia.

There was a risk price caps would occur in New Zealand, but it would be a surprise, he said.

Line companies were targeted in terms of outdated pricing structures, poor incentives to improve efficiency, the small size of some and poor governance.

There was no mention of forcing mergers but Forsyth Barr expected a focus on standardising lines company pricing structures, merging operations. Ownership merging would not be encouraged as it was too hard politically, Foster said.

“New retailers don't like the ability of incumbents to win back churning customers. We expect win-back rules to be strengthened through a longer stand-down period.”

Low user fixed charges were likely to be scrapped and the expert panel considered there might be merit in having a single regulator for energy.

*Dene Mackenzie is a Dunedin-based business commentator.

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