NZIER report on compensation for transmission infrastructure

there will be an incentive for Transpower to use them in situations where other
options involve less real resource cost. This would lower long term net welfare.
From a transmission utility‟s perspective easements are worthwhile if they are less
costly than alternative options for routeing and locating transmission lines and
facilities. The saving relative to the next best alternative creates an economic surplus
for the utility. From a national perspective, however, the true surplus is over and
above the full cost of the easement, including the compensation paid for it.
2.2 Equity – splitting the surplus
Equity is concerned with how efficiency gains or rents from economic activity are
distributed between parties. Beyond covering the full cost of land occupancy,
easements also create some economic rent in savings relative to the next best
alternative. In New Zealand the total surplus appears to accrue to Transpower, as it
is legally required to provide compensation equal only to what the easements cost
landowners. In other countries, however, landowners share in the surplus created by
easements. 10
Other than identifying the distribution of costs and benefits (both direct and indirect)
across the parties, economics has little to say about equity, perceptions of which are
determined in each community according to factors such as social and political
considerations. On the other hand, although splitting a surplus may be considered
purely a distributional issue, there are situations in which it affects efficiency as well
(see 2.3.2 below).
2.3 An economic framework
As discussed above an accurate assessment and comparison of the total costs for
transmission infrastructure is needed so as to identify the most efficient option for
transmitting electricity. The net cost of an easement includes the impact of
transmission lines on the value of the affected land, incorporating any change to
future sales value and the net present value of revenue streams. These costs are
borne by landowners in the first instance and are represented by the upwards sloping
line in Figure 1. (The line slopes up as landowner easement costs vary with landuse).
This line represents, if all costs are known, the minimum price a landowner
would be willing to accept for an easement.
10 In Canada, Finland, and the United Kingdom for example, see Nuuja and Viitanen 2007; Hydro-
Quebec 2000 and Hamer and O‟Brien 2007.
<strong>NZIER</strong> – Compensation for transmission infrastructure 11