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Shore tender failure gives lie to electricity industry competition claims

11 asked to tender — only the incumbent bid

The electricity industry has demonstrated very neatly, pre-election, the lie of claims that the private sector does best and that the industry is — well, remotely would be stretching it — devoted to the notion of competition.

The giveaway, the cost-plus charging mentality, the failure to offer customers an honest plan

I stopped writing about this industry several years ago, after explaining many times that the privatisation of the Waitemata and Thames power boards was not being done by a free giveaway of shares, as the new company, Power NZ, proclaimed, but that customers were paying for the creation of these shares.

I also wrote many a word, incredulous that this industry should base its pricing structure on a theoretical replacement cost of dubious merit. Customers of today would be charged according to a future asset replacement cost worked out on a full cost-plus basis. It was very handy for an incoming majority shareholder, which could collect the margin between what was charged under this monumentally bad system and actual cost.

The industry, almost in its entirety, was handed over in the early 90s to business interests which might or might not have some idea of how to run a power supply company. Their concern was to make money. One of their methods was to amass customers — critical mass being an important factor in business resale value.

In recent weeks I’ve received calls from a hopeful supplier’s call centre wanting me to switch supplier. Not surprisingly the call centre staff haven’t been able to respond to questions about their company’s pricing (including the loading of prices by the use of line charges which defeat a customer’s attempts to alter the expense of power use by using less electricity), their company’s future, and their company’s future policies regarding competitive pricing.

Call centres don’t expect arguments. They want a quick yes from the person on the other end of the phone so they can start the switch of supplier, but will accept a quick no.

They don’t want someone refusing a $50 gift as the basis for a long-term shift in supplier, and demanding to know what long-term benefits will be offered.

Holman says tender demonstrates lack of genuine competition

So it was only reluctantly that I picked up on a statement issued on Friday by Tony Holman (right), chairman of North Shore City Council’s strategy & finance committee.

Cllr Holman said the lack of genuine competition in the power industry would cost North Shore ratepayers about $250,000 more this financial year.

The council asked 11 power companies to tender for its electricity supply contract — and only one, Genesis Energy Ltd, replied.

Genesis has the existing contract, as successor to Power NZ by buying its customer base. Genesis is a government company, so the privatisation process has taken the business from locally run boards through the control of American businessmen who arrived without a knowledge of local systems or network, and without a knowledge of tact, to a state-owned system whose operators pretend it’s all private-sector business.

Genesis offered to supply the council with power for the next 2 years (July 2002 – June 2004) for $2.32 million/year, 12.6% more than its existing annual contract rate of $2.06 million.

Council accepts, but says it’s a mockery

The council accepted the deal, which is at a lower rate than residential power users are paying.

Cllr Holman said the city should be getting a much better deal.

“This level of increase is unjustified and makes a mockery of the claims made by some that a deregulated electricity sector would boost competition and lower prices.

“For only 1 company to put in a bid tells the true story. Our efforts to bulk-buy our power by joining forces with 6 other councils and 2 companies still failed to attract wider interest or keep the price down.

“This price surge hits 2 of our most critical council services: roading & sewerage. It’s not fair on cities like ours to have to absorb the costs, particularly when we’re dealing with environmentally critical assets such as our sewage treatment plant & street lights, which need a lot of power.”

Re-tendering might bring only higher bids, advisors suggest

Independent energy advisors have told the council that the Genesis offer is the best arrangement the council could expect and that re-tendering might attract even higher bids, if any.

Cllr Holman said it was a bitter pill for his council to swallow having fought a losing battle alongside neighbours Rodney District and Waitakere City back in 1993 to stop the “giveaway” of the former Waitemata Electric Power Board. North Shore City Council’s “Blackout power rally” in March 1993 featured anti-privatisation themes & predictions of hefty power rises in years to come.

“Another free-market failure exposed, but it costs us all,” Cllr Holman said.

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