Electricity Pricing in New Zealand and the Australian State of Queensland: Accounting for the Impact of Sector Restructuring

• Author: Stuart Tooley,Jill Hooks
• Date: 01 November 2015
• DOI: http://doi.org/10.1111/faam.12064
• Published date: 01 November 2015

Financial Accountability & Management, 31(4), November 2015, 0267-4424

Electricity Pricing in New Zealand

and the Australian State of

Queensland: Accounting for the

Impact of Sector Restructuring

JILL HOOKS AND STUART TOOLEY∗

Abstract: The electricity industries of New Zealand (NZ) and the Australian state

of Queensland have undergone substantial structural and regulatory reform with

the common intent to improve economic efficiency. Deregulation and privatisation

have been key elements of the reform but have been approached differently by each

jurisdiction. This study traces the link between structural and regulatory regimes

and asset valuation, profits and, ultimately, pricing. The study finds that key drivers

in recent price increases are the government-owned generation and retail sector in

NZ and the government-owned distribution sector in Queensland. It is concluded

that, contrary to the rationale for the imposition of regulatory controls in a non-

market environment, the regulatory regimes appear to have contributed to higher

rather than lower pricing structures.

Keywords: electricity, regulation, asset valuation, electricity pricing, electricity

reform

INTRODUCTION

Internationally, many countries have undertaken reforms in their electricity

industries. Although the scope and intensity of the reforms differed across

countries, the reforms have brought about the dismantling of an industry

that was characterised by its monopolistic vertically integrated generation,

distribution and supply structure. The traditional structure was justified by

the economic, social and political importance of electricity (Yi-chong, 2005);

∗The authors are respectively, Professor at Massey University, New Zealand; and Associate

Professor at Queensland University of Technology, Australia. They gratefully acknowledge

the research assistance of Tony Hooks in collecting data for this paper.

Address for correspondence: Jill Hooks, School of Accountancy, Massey University, Private

Bag 102–904, North Shore Mail Centre, Auckland 0745, New Zealand.

e-mail: j.j.hooks@massey.ac.nz

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however, by the 1980s there was a concern that the industry was failing to deliver

(see Helm, 2004). For developed countries, concern over capacity and demand

imbalances, and productive inefficiency drove the reform agenda to bring about

improved efficiency; whereas for developing countries, the immediate concern

was a shortage of capacity and hence a reform agenda that focused on the need

for access and reliability of supply (Pollitt, 2009; and Williams and Ghanadan,

2006).

The electricity industries of New Zealand (NZ) and Queensland1(Australia)

were not immune to the international trend for reform, and during the 1980s

and 1990s the respective industries underwent fundamental change in their

operational and ownership structures (see Gunn, 1997; and Sharma, 2003).

Consistent with what was happening in other developed jurisdictions, the

industry reforms were undertaken with the expectation of improved economic

efficiency.2Improving efficiency is dependent on a comprehensive approach

to reform, including an appropriate interface between sectors of the industry,

competition, and a regulatory regime that prevents monopoly pricing where

competition is not present. Although there is a body of literature that has

examined electricity regulation and ownership, prior research has primarily

focused on individual sectors of the industry (e.g., Shuttleworth, 2005; Jamasb

and Pollitt, 2007; Joskow, 2008; and Mountain and Littlechild, 2010). The study

reported in this paper takes a broader approach and examines the inter-

relationship between electricity industry sectors - generation, transmission,

distribution and retailing3- with a view to comparing the regulatory controls and

ownership structures of the NZ and Queensland electricity industries and the

costs and price movements in the respective markets. The NZ and Queensland

electricity industries have a similar number of electricity connections, but

differences in ownership structures and operational scope provide a unique

research environment. The contextual differences are identified and explored to

investigate why the cost of electricity distribution has risen relatively slowly in

NZ, compared to Queensland, following industry restructuring; and conversely,

why electricity generation and retailing costs have risen much faster in NZ than

in Queensland.

The paper is organised as follows. The next section explains the operational

and ownership structures of the NZ and Queensland electricity industries and

is followed by a section which scopes literature relevant to the restructured

electricity industries in Australia and NZ within the context of economic

reforms. Then an introduction to regulation theory and the relevant regulatory

controls applied to the sectors being studied is provided. This is followed by

a section which compares and contrasts the electricity industries of the two

jurisdictions over the period of industry reform (2000-2011) focusing on the

relationship between economic outcomes and ownership; and the effect of

different accounting treatments, particularly in regard to asset valuations. The

paper ends with a conclusion.

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