Power companies letting down the vulnerable

Many of you will remember the shocking story of Folole Muliaga, who died in 2007 when her automated oxygen stopped after her power was disconnected. Industry guidelines were subsequently put in place that require power companies to give special consideration to vulnerable families and people reliant on electricity for medical reasons. The idea was to avoid a similar tragedy.

Five years on, the guidelines aren’t doing the job. The Electricity Authority admitted last week that last time it checked, eight retailers were not complying with the code. The Authority is conducting a second round survey and hoping the companies have since fallen into line.

Couple that with the fact 42,600 families were disconnected for failing to pay their power bills in the year to September 2013 – four times the level in the year following Mrs Muliaga’s death – and the situation starts to look increasingly dangerous for New Zealand’s most vulnerable.

Power prices have risen 22% since National came to power – many households are struggling to pay their bills.

We need game-changing policies within the electricity sector that protect people from soaring prices. That’s why the Green Party recently introduced our NZ Power plan, which will save households $300 a year, and our Solar Homes scheme, to help homes to install solar and break free from the big power companies. And the sooner people achieve this energy freedom the better, because these companies clearly don’t have Kiwis’ best interests at heart.

7 Comments Posted

  1. As a further example, the Commerce Comission have just published “International Price Comparison for Retail Mobile Telecommunications Services 2013” [Available here].

    The takeaway was that in those market segments where there was effective competition (due to 2 Degrees being a serious competitor) then New Zealand tariffs fell to well below the OECD average.

    Back in 2008, just a few years ago, no plan in New Zealand rated better than 23rd in the OECD, the worst being 27th. In 2013 the worst plan in NZ rated 26th, with the best at 5th.

    As I noted above: Price signals work when consumers have choices.

  2. Take some commodity items at DIY stores and compare them between Mitre10, Bunnings and Placemakers. Some retailers have the products at slightly different prices, so smart shoppers avail themselves of the best prices at the stores that offer them. The shoppers have choice, so the system works, right?

    Yes, it does. As you yourself agree. However, you then try – AND FAIL – to disprove it by comparing prices here and elsewhere. Yes, we are being rorted (and I suspect I have this on far better authority in the DIY sector than you do), but that isn’t a failure or otherwise of price signals. That is a different problem. By consumers choosing to purchase at the lower price, that is price signals working.

    A capitalist would tell you that what should happen is another retailer should spring up and undercut M10, Bunnings et al. But it hasn’t, so we have to ask why not.

    The biggest part of the answer, as if you didn’t already know it, is barrier to entry.

    An electricity retailer doesn’t need to build sheds the length of the country, doesn’t need (in fact, cant) to hold stock, doesn’t need to manage world-wide and country-wide logistics. So many of the real constraints that do prevent another DIY chain appearing do not exist in (fair) electricity retailing.

    In my world, a retailer could set up with $10K in the bank. And charge what he likes for electricity. Because of that nice NZPower, the buying price is not all over the place requiring hedging and other such stuff, and it is a level playing field for all retailers. Transmission, distribution, metering are all regulated and thus again not subject to whim. These are exactly the sort of conditions that allow startups to form and compete and deliver.

    Because the barriers to entry are so low, if the prices rise, new retailers will form and grab the business from more expensive players.

    Markets can deliver stunning results when the circumstances are correct. They can also fail spectacularly. My thrust is to create the conditions where markets will deliver great outcomes.

    Do you have any better ideas?

  3. We do agree on one thing. You did not have enough time.

    Essentially, the generators could charge what they like…

    It wasn’t just the generators who gamed the market. Enron gamed the distribution, purposely overbooking lines then creating conditions which forced others to use the overbooked line.

    But the deregulated, unbundled system in California was supposed to drive prices down because consumers would have more choices. Now- it is very true that the way California unbundled and deregulated is completely different than the current proposal. The point is that companies can make handsome profits from gaming the system- any system- they will.

    Price signals work when consumers have choices.

    Wow. You really believe that? You are harboring a religious faith in markets, nothing less. This point of view is poppycock and empirical observation will prove it is not so. Is the market big enough in NZ for that to work? Check your theory. Take some commodity items at DIY stores and compare them between Mitre10, Bunnings and Placemakers. Some retailers have the products at slightly different prices, so smart shoppers avail themselves of the best prices at the stores that offer them. The shoppers have choice, so the system works, right? Wrong. Compare those same items to those available in a country with a more substantial market like the UK or the US. Just do a shopping list of items like hammers, plumbing pipe etc. PVC fittings? Say you want a cap. $1USD for a 1 1/2 inch cap (38mm). For a 32mm cap at Bunnings? $13.27NZD. Same absurd prices at Mitre10 and placemakers. Brand name stuff? How about a Makita 3 piece combo tool set (bunnings search DK18016S)- it is $450. At Mitre10 just the drill alone from that set is $479. At Home Depot in the US? That combo (their code LCT306W)is $239 USD.

    Retailers are gouging like crazy, and all of them are doing it (Here’s another example from the tech products segment. Why does this happen in NZ? Because the market is so small that the retailers can get away with it.

    Which brings us back to the point of I was making about economics of scale. You might ask- NZ has choice in retailing, so why are price signals not correcting the artificially high prices? Why isn’t the market correcting itself for the observed price gouging? It’s because it is not in the interests of retailers to destroy their profit margins. They are interested in maximizing their profits, not offering the best prices to consumers. But you seem to think that the market is beneficent and generous and really does have the consumer’s interests at heart. It’s nuts. So why do retailers maintain high prices? Because they can.

    It need not be explicit collusion in the legal sense. It is what economists call tacit collusion.

    It happens when there are few enough retailers that no one will engage in price wars. And a mature market trends towards reduction in the number of players due to the economics of scale. I was pointing out the dynamics that will reduce the number of electricity retailers. If those dynamics are not addressed, you will see precisely the same tacit collusion as in other retailing segments in NZ.

    Why would there no such consolidation into a retailers with market power? Are we to believe in pixie dust?

  4. Although I don’t have time for a full reply John, you have a flaw in your understanding of what went wrong in Cali. Essentially, the generators could charge what they like, and did, and the retailers had to pay for that very expensive electricity at source, and they could do nothing else other than pass on their cost plus margin.

    The Labour/Greens propose to fix that with NZPower, which will act as a single price single supply clearing house. Retailers can put margin on top of that. As there is no barrier to entry to retailers, if there is price gouging, then more retailers will appear.

    Price signals work when consumers have choices.

  5. Buckley’s proposal engages in the wishful thinking that the beneficent invisible hand of unfettered markets will deliver the people the lowest prices. Why is this fanciful? Take a look at California’s experience with such “deregulation”. The economies of scale in power markets meant that the best prices offered by retailers were those who could buy in the largest quantities and thereby had the greatest leverage over producers. The job of these retailers was to deliver the greatest profit to their shareholders and so colluded with each other to manufacture shortages of energy and thereby drive up prices. Although California had 45GW of generating capacity and only 28GW of demand, a demand supply gap was created by electricity traders and they were able to sell power at a premium of up to a factor of 20 times the generators’ wholesale price.

    We should we think that there will not be a similar consolidation of the retail market due to small retailers being unable to compete with larger outfits who buy in far larger quantities? Why should we think that the handful of remaining energy retailers would not collude with each other or rig the market as Enron did?

    Kiwis have been subjected to fundamentalists preaching how deregulation and privatization uniformly delivers superior results for every policy problem under the sun. That religious belief defies logic and the facts about how electricity markets actually behave.

    At a larger level, if we are to wean ourselves from a carbon based economy, that market will fight us every step of the way. If we can export electricity via aluminum and thereby force NZ consumers to pay global electricity prices, then markets will suck up every inexpensive kilowatt it can, export it, and thereby drive up prices (and their profits). Solar and wind and other carbon neutral electricity schemes? Why should they be interested if they can purchase fossil fuel electricity at a lower prices? So on the face of it, it is a lunatic proposition to suggest that the market should be allowed to seek optimal solutions for generating profit. As Gareth pointed out, its not their job to deliver low prices. Nowhere in their corporate goals do they see their mission as moving NZ to carbon free electricity generation. If a society thinks it is time to do something substantial about averting climate catastrophe, they ought not expect corporations to assist out of the goodness of their hearts. It’s not their job to save the world. If there is a substantial profit in accelerating the world towards climate apocalyptic scenarios, they will do so. How companies make profit in that future environment is also not their job- They must deliver bottom line profits in the near term.

    In the market’s mindset, everything else is someone else’s problem. To believe otherwise about markets is simply telling a fairy story.

  6. If the Labour/Greens really want to make a difference to power, then probably the most effective way would be to split the genetailers. So a company can either be a generator, in a regulated environment, or a retailer in an entirely competitive environment, with absolute minimal barriers to entry.

    To make this possible, all metering would have to move to the lines companies, which is happening anyway, a number of lines companies have set up SmartCo as a joint venture. For reasons in the next paragraph, all these meters need to be remote reading (smart? dumb?) meters.

    Literally, anyone should be able to set up as a retailer. The only requirements I would make would be that (a) retailers must publish prices freely via an agreed interface so that whatsmynumber and such services (or indeed individual consumers) can find out exactly what the pricing structure is, (b) retailers can only sell at these book prices that are published. So they can offer any deal or rate that they like, but it must be available to anyone who wants it. Finally, (c) the system that ports customers to different retailers has to be made instant, so someone can change retailers at the drop of a hat.

  7. How many of those 42,600 disconnects were to rental properties? I expect most would have been. The Solar Homes Scheme is unlikely to be taken up by landlords, so that won’t help the renters. The home insulation scheme you pushed through will help many people, but again is not likely to be taken up by many landlords either. I don’t see your NZ Power plan actually reducing power prices that much, so if you are serious about helping those in power poverty, I suggest that the rental building warrant of fitness might be more effective, along with any other measures to reduce the power requirements of rental properties.


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