Do our power companies make too much money? An inconclusive answer

Are the power companies making too much money?

That’s the question asked by the Consumer Advocacy Council – a body that will soon be axed as part of the Government’s cost-cutting drive.

But the council – an independent advocate for residential and small business electricity consumers – can’t answer it because it says new disclosure rules are not good enough.

The council commissioned research to determine whether the disclosure rules were fit for purpose and delivering good information to consumers about profits being made in the electricity sector.

“Consumers have a right to know if the companies that provide such an essential service are inflating their profits so it’s disappointing we are none the wiser,” council chair Deborah Hart said.

The analysis, carried out for the Council by the New Zealand Institute of Economic Research (NZIER), found the disclosure regime was not providing robust information.

New rules were introduced by the Electricity Authority, following recommendations from the Electricity Price Review in 2019 that called for changes to shed light on whether, and the extent to which, generator-retailers, or “gentailers” were making excess profits.

Under the rules, gentailers – companies that both generate and sell electricity – are required to disclose their internal transfer price.

This is the price they use internally to “sell” power to their retail arms.

Internal transfer prices can show how gentailers allocate costs and revenue between their generation and retail businesses.

“While this information can be used to gauge whether companies are artificially inflating prices and earning excess revenue, NZIER found the current disclosure regime was unlikely to tell consumers whether this was the case,” the council said.

The NZIER report found shortcomings in the disclosure regime, which limited the usefulness of the information provided.

“A key problem is that the revenues earned by gentailers are not being compared with a model of generator costs and profitability in a working competitive market,” Hart said.

“Without a robust baseline for comparison, the disclosure rules are limited in what they can tell consumers.”

The rules also require both gentailers and electricity retailers with at least 1 per cent market share to publish their retail gross margins.

This information can provide an indication of whether gentailers and independent retailers face a similar or different cost structure for the wholesale cost of electricity.

However, retail gross margin data have been disclosed for one year only – 2022 – making it difficult to draw conclusions, NZIER found.

The Electricity Authority plans to carry out a post-implementation review of the disclosure rules.

The review needed to look carefully at how to ensure consumers get reliable information about whether gentailers’ profits were excessive or not, Hart said.

“Without this information, consumers will continue to raise legitimate questions about whether the price they’re paying for power is fair and whether the market model we have needs to be reformed.”

The Consumer Advocacy Council was established in 2021 following a recommendation from the 2018/19 Electricity Pricing Review, which found that small electricity consumers were struggling to be heard by the electricity sector.

The council will be wound up on June 28 as outlined in the last Budget.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.