Disclosure rules on gentailer profits

Background

In its 2019 report, the Electricity Price Review (EPR) recommended rule changes to find out if gentailers – power companies that both generate and sell electricity – were making excess profits. 

In response to this, the Electricity Authority (EA) mandated that gentailers disclose internal transfer prices (ITPs) – the transaction prices between the generation and retail arms of their businesses.  

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

We asked NZIER to answer the following questions:

• Are the disclosure rules providing adequate information?
• Is the approach to analysis undertaken by the EA, particularly the use of a range of benchmark ITPs, appropriate?
• Are any changes needed to disclosure rules or the analytical approach to ensure consumers have robust information on whether gentailers are making excess profits? 

Findings

NZIER analysed the ITP and retail margin disclosure data published by the Electricity Authority along with the disclosure process. They also reviewed independent retailers’ submissions on gentailer pricing and the disclosure regime. 

The research found that:

• The disclosure rules are not providing adequate information. We can see how these companies allocate cost, revenue and risk within their businesses, but we can’t tell if their generation revenue is excessive.
• The benchmarks used by the Electricity Authority to compare the ITPs disclosed by gentailers are difficult to interpret. The revenues are not compared with a model of generator costs and profitability in a working competitive market. Without a robust baseline for comparison, the disclosure rules are limited in what they can tell consumers. 
• There is a requirement for both gentailers and electricity retailers with at least 1% 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 about trends in wholesale prices or margins for independent retailers. 

Next steps

The Electricity Authority plans to carry out a post-implementation review of the disclosure rules. We believe the review needs to look carefully at how to ensure consumers get reliable information about whether gentailers’ profits are excessive or not. 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.