Saturday, October 2, 2010

THE STRUCTURE OF THE ELECTRICITY INDUSTRY by Wayne .J.

Members Talk: Wayne Jackson
As is often the case, our own Club members talks can be more enlightening than imports, so if you missed last weeks talk by Wayne, I thought it was worth repeating.
Luckily I took some notes, ( and help from Wayne).


THE STRUCTURE OF THE ELECTRICITY INDUSTRY

Pre deregulation the New Zealand Electricity Department (NZED) owned most of the generation and the national grid. They supplied local community owned Power Boards and Councils (MED`s) with electricity who delivered it to local consumers via their local networks. Each Power Board or MED had an exclusive franchise to supply electricity in their area. The industry was not very efficient by today`s practices and being Government and community owned made little profit and paid little tax.
Under the banner of increased efficiency leading to lower prices Government divided its generation into the SOE companies Mighty River Power, Genesis and Meridian, sold off Contact as a listed company, and structured the national grid into the monopoly SOE known as Transpower. Government also required Power Boards and MED`s companies to trade at a profit, pay tax on those profits, and cancelled their exclusive franchise areas meaning that any one of them could trade in any geographical area. The objective being that the resultant competition would reduce prices to local consumers.
Prices didn`t come down, large consumers got good deals and as the margin on electricity decreased network line charges were increased so that Power Boards and MED`s who were now trading as community owned companies maintained profitability.
Obviously Government were not happy with this cross subsidisation and resultant outcome so they legislated that local Power companies could be retailers and generators but could not own networks or they could be network distributors and not own generation or be a retailer. Generators being mainly Mighty River Power, Genesis and Meridian could also be retailers. With the exception of TrustPower all the local network distributors sold off their customer lists to the SOE`s and took the safer option of being a Network company. Over the years through local ownership preference to sell or merge their Network companies the number of these have reduced from 55 to 26.
Since this structure was adopted electricity prices have continued to rise at regular intervals and are predicted to keep rising as demand increases.
Governments approximate ownership by sector of the electricity industry today is, generation 70%, national grid 100%, retail 70% . The non government owned portions do not represent a lot of owners, mainly Contact Energy, TrustPower and a small number of niche market operators.
It is interesting to consider that it wasn`t so many years ago that virtually the whole of the electricity industry was owned by the tax payer and rate payer and that the price of delivered energy was a lot cheaper than it is today. It is even more interesting to reflect that although the industry is much more efficient post deregulation, just how much money government receives in dividends from its SOE companies and taxation from industry participant companies and GST.

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