Hickey on power prices and rates

August 17th, 2014 at 1:00 pm by David Farrar

writes:

Local governments and electricity companies are to blame for New Zealand’s rate being much higher than it should have been for the past 10 years.

They have raised their prices between 5 and 8 per cent each year for the past decade, despite being semi-regulated and mostly publicly owned.

Let’s have a look at annual electricity inflation in the CPI:

  • 2004: 8.8%
  • 2005: 4.1%
  • 2006: 7.1%
  • 2007: 6.5%
  • 2008: 7.7%
  • 2009: 2.1%
  • 2010: 5.8% (2.2% is a GST increase compensated by tax cuts)
  • 2011: 2.4%
  • 2012: 5.2%
  • 2013: 3.0%

Now let us look at .

  • 2004: 3.9%
  • 2005: 7.5%
  • 2006: 7.4%
  • 2007: 6.7%
  • 2008: 5.7%
  • 2009: 5.9%
  • 2010: 6.9% (2.2% is a GST increase compensated by tax cuts)
  • 2011: 4.6%
  • 2012: 4.3%
  • 2013: 4.1%

So I agree with Bernard both have been big contributors to inflation, and both are too high. I would note that they both seem lower in the last five years than the previous five years.

Electricity inflation averaged 5.4% from 2004 to 2008 and 3.3% (excludes GST change) from 2009 to 2013. Rates inflation averaged 6.2% from 2004 to 2008 and 4.7% (excludes GST change) from 2009 to 2013. 

Although the rates have trended down since 2004, they are still much higher than the Reserve Bank’s 1 to 3 per cent inflation target. And that persistent inflation has acted like a type of plaque in the arteries of the economy, putting up its blood pressure of inflation, interest rates and the exchange rate.

Without that persistent inflation at two and three times the rate in the rest of the economy, New Zealand’s interest rates and currency would have been significantly lower.

I’ve always wondered why Reserve Bank Governors Graeme Wheeler and Alan Bollard haven’t convened a conference of mayors and CEOs of councils, electricity generator-retailers and lines companies to read them the riot act.

Not a bad idea. But how much do they contribute?

Electricity is 3.9% of the CPI and rates 2.7% so they make up 7.6% of total costs.  On average they have been responsible for the inflation rate being 0.3% higher per year than it would have been if there were no price increases. A better comparison might be the impact if they had been at the target 2%. Their contribution then is an extra 0.2% a year – which is not insignificant in a tight range the Governor must target.

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15 Responses to “Hickey on power prices and rates”

  1. slijmbal (1,236 comments) says:

    With down trou’ Len in Auckland and living on the Shore our rates increases have been 10% p.a. for several years. I think they dropped (cue ironic applause) to about 8% an increase this year.

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  2. Rowan (2,409 comments) says:

    I have a just got a rate of 9.43 c/kWh fixed for 3 years with no lock in contract which I am fairly happy about. Quite a bit less than who we were with on our previous place.

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  3. marcw (249 comments) says:

    Rates and power are essentials and, within limits, cannot easily be negotiated (apart from moving, or the smallish savings you can sometimes make on Powerswitch). People on low incomes therefore are more affected when both these household costs are increased, especially rates as the increase is not in proportion to your ability to avoid costs. Therefore the 0.2% increase contributed to CPI is really understated – it is probably more like a 0.5 – 1.0 % relatively for people on low incomes. My rates for example went up 9% last year, and 20.6% this year, so the 0.2% contribution to CPI figure you can use is really meaningless.

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  4. kowtow (8,521 comments) says:

    Coal prices have fallen massively and we’ve got shit loads of it.Cheap electricity under our feet. Get burning.

    Local rates. Councils out of control spending up big on big projects. Dunedin good example. If only rate payers got the vote it would ensure that shit wouldn’t happen.

    Both problems so easily fixed.

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  5. Simon Arnold (109 comments) says:

    This is just an example of the longstanding issue of tradable goods and services being under tighter price pressure than non-tradables. For those interested have a look at M1 prices at the RB website http://www.rbnz.govt.nz/statistics/tables/m1/ (last decade ~13.4% tradables and ~40% non-tradables).

    The issue for exporters has always been the extent to which they face competition and this constrain prices whereas the non-tradable sectors are “protected”, drive inflation, and cause interest rates to have to rise and the $ to appreciate, and undermine the tradables’ competitiveness.

    This is why the Productivity Commission is so important and we should encourage the use of the internet to enhance competition for services and retail (not to mention constrain statutory monopolies like local government).

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  6. freemark (581 comments) says:

    Rowan (1,891 comments) says:
    August 17th, 2014 at 1:15 pm

    That’s a great rate Rowan – I see many power bills and that beats anything I have viewed even from large commercial users.
    You must have a pretty big daily fixed charge, are you including the lines company charge as well?
    Best I can buy domestically from PowerShop ATM is 29.82c (inclusive of line charges & GST). I’m a low user and spend around $70 per month all up in Winter.

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  7. Rowan (2,409 comments) says:

    Freemark
    Wish my total bill was that low, supply charge is $1 per day, at this time of year bill is still about $220, hopefully it will get lower going into spring and summer as we need heat pump daily at the mo.

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  8. UrbanNeocolonialist (289 comments) says:

    The power price rises have been an absolute rort, driven in large part by successive complicit govts that as primary share
    holder received massive dividends from the resulting profit and so had no interest in preventing the electricity cartel from hiking prices.

    The producers had a laughably exploitative system of increases that involved taking the capital value of power plants and then setting an electricity price to give an ROI at an upper limit of what would be politically acceptable for those assets and then using the increased income that resulted from the increase to justify a massive increase in capital valuation the next year. Rinse, repeat etc until it became politically problematic/embarrassing.

    So it is good to get electricity production out of Govt ownership so that they can finally be regulated as the monopolies they are. But in the meantime NZ has thrown away any competitive advantage it had in having what should be nearly the lowest cost electricity production in the world.

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  9. wreck1080 (3,923 comments) says:

    Particularly worrying since demand for power is actually now dropping or flatlining at best.

    The current electricity structuring is not working otherwise prices would be falling as per typical supply / demand economics .

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  10. lolitasbrother (701 comments) says:

    About utility prices.

    I just paid NZ Contact Energy $NZ 240 for one month energy in July and Vodafone $150 for phone and internet,
    Christchurch.
    OK I have clients in for rental ,they pay EQC rates in Christchurch but on top of that is the wood logburner costs.
    This is power and internet about $400 Logburner another $150.
    These are journal ledger costs.. and Yes ok its six rooms at home and Winter is hard in the southern towns ….

    l also paid my Bangkok Condominium utility today only 7000 baht for July, accommodation, and electricity and Internet.
    Yes only $300 for living and everything in house. This however is only 30 meter square as opposed to 120 meter at home. But compare those costs and rates NZ.
    I met a Norwegian man with his wife at the restaurant, I said to him why are you here, he answered ” you know already Australian” and we laughed and we laughed, and his wife could see the cameradarie

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  11. publicwatchdog (2,613 comments) says:

    What was broken when we had a Department of Electricity and local Power Boads?

    Oh – that’s right – NOTHING.

    Commercialise – corporatise – PRIVATISE in the name of ‘efficiency’.

    Now increasing numbers of New Zealanders can’t afford a soak in a hot bath – or to have the heater on in winter.

    Penny Brighr

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  12. EAD (1,128 comments) says:

    You can see why life is so tough in NZ when you look at figures like this. Food and Petrol are going up at similar rates and housing at arguably a greater rate.

    When the average pay-rise is 2-3% yet the true cost of living is going up 5% per year, over a number of years this adds up to a lot and explains why so many people are running faster and faster just to stand still.

    It is also worth remembering what inflation is, an what inflation isn’t. Inflation is a rise in the money supply. CPI measures the changes in the price level of a basket of goods as they respond to the increased money supply.

    It is why I advocate a gold standard – stop our effin governments borrowing money and banks creating money out of thin air.

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  13. Kimble (4,440 comments) says:

    People like Penny Bright never explain a plausible mechanism by which the price rises in energy are due predominantly to privatisation.

    Just point to price rises. Point to how the industry is not nationalised. And claim that one caused the other.

    They rely on people assuming that the link exists so they treat it as if it is self evident.

    They ignore how nationalised industries HIDE the real costs. They never bother explaining how a nationalised industry would result in greater efficiency (which is COST, something else they ignore).

    They are third rate minds who should be ignored until they deal with these issue honestly.

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  14. Kimble (4,440 comments) says:

    Would you accept that weak argument in anything else?

    Why is the new iPad more expensive than the last? Well, according to the Penny Brights of the world, it is because Apple isn’t nationalised.

    The ridiculous paucity of intelligent analysis from the “everything that was ever nationalised should have always stayed nationalised and everything bad that has happened since privatisation only happened because of the privatisation” crowd is bordering on offensive.

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  15. burt (8,275 comments) says:

    Somebody’s got to say it;
    It’s different when Labour do it !

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