Contact Energy price rise ‘first of many’ as sector braces for regulatory ruling

Friday, 25 October 2024

Most of the increase in power prices this year and next will be due to lines company charges.

Consumers would be very concerned about the prospect of higher electricity bills after Contact Energy said it would be putting up its prices, Energy Minister Simeon Brown, has acknowledged.

“We need a more competitive market. But at the same time, we need more supply,” he said.

Contact chief retail officer Matt Bolton said last week it would increase its prices by an average of about $5 a week from December, with the change feeding through over time to all its 440,000 electricity customers.

The price rise appears mainly in anticipation of a hike in lines company fees and transmission charges early next year.

The Commerce Commission warned in May that a draft decision it has made raising the cap on the revenues lines companies and national grid owner Transpower can earn would push up power bills by about $15 a month from April, and $5 a month each year after that, until 2030.

Margaret Cooney, chief operating officer of British-owned power retailer Octopus Energy, said Contact’s price rise would be “the first of many” as retailers responded to that change and a tight wholesale market.

The Commerce Commission sets a revenue cap on Transpower and lines companies every five years and expects to finalise its rates out to the end of the decade towards the end of next month.

Its draft decision would allow lines companies and Transpower to raise their charges by 50% and 43%, respectively, over the five years from April.

Interest rates are on the way down, but will have a long-lasting sting in the tail because of the way some monopolies are regulated.

Although that in part reflects a consensus that they need to increase their investment in electricity distribution infrastructure, 40% of the cap rise flagged in the draft ruling was attributable to interest rates.

Interest rates affect the commission’s calculation of the return that lines companies and Transpower should be allowed to earn on their assets.

For the purposes of its draft ruling, the commission estimated their so-called weighted cost of capital (Wacc) at 7.37%.

The benchmark that will be used in its final ruling is based on the average government bond rate during three months to the end of August and has been set at the slightly lower figure of 7.1%.

All other things being equal, that should mean April’s price rises are a fraction lower than those forecast by the commission in May.

However, forecasts of future interest rates have fallen considerably since August and the cut-off date used by the commission means only a small part of the benefit of that will flow through to consumers.

It is understood the commission’s view is that to some extent it is the luck of the draw, and could be viewed similarly to someone fixing their mortgage at a rate that later turned out not to have been the most advantageous.

Tracey Kai, chief executive of Electricity Networks Aotearoa, which represents lines companies, said electricity prices would increase, but until the Commerce Commission released its final decision next month the amount would be unknown.

“Consumers want to use electricity whenever and however they need it, and investment is needed by networks to meet this demand,” she said.

“We only need to look at other sectors, such as water, to see the consequences of not adequately pricing, maintaining and growing essential infrastructure.”