NZIER report on compensation for transmission infrastructure

2.3.1 Estimated easement costs and efficiency
If the cost of an easement is under-stated, and acquired at that cost, then an
easement may be constructed when it is the more expensive option for transmitting
electricity. This would create a net loss or “negative surplus” for society at large (the
true costs are greater than the cost of the next best alternative, see „net loss from
easements‟ in Figure 1). In these cases the underestimated portion of easement
costs is borne by landowners. An easement should be created only if it is the
cheapest and hence most efficient alternative (the sloping line is beneath the flat line
in Figure 1).
Transpower may be faced with, for example, the option of running lines over land that
is predominantly used for dairy farming or alternatively a longer route over land
mainly used to graze sheep (as discussed in section 4.2, transmission infrastructure
imposes significantly higher costs on dairy relative to sheep farms). If the additional
costs imposed on dairy relative to sheep farmers from transmission infrastructure are
not considered properly then the shorter route may appear to be the cheaper option.
This would create a net loss.
The full costs imposed on the landowners as well as on Transpower in both
situations need to be considered when choosing the appropriate route. It may be
cheaper for Transpower to run lines the shorter distance over dairy farm-land, yet this
option would impose greater total costs when the costs imposed on dairy landowners
are included in the calculation.
2.3.2 Splitting the surplus efficiently
In theory, compensation equal to the costs imposed on the landowner from an
easement would be efficient, as would compensation slightly less than the cost of the
next best alternative to Transpower. If Transpower is required to transfer the full
surplus created by a given easement to the landowner, however, then it will be
indifferent between creating that easement and alternatives. Thus, an alternative less
efficient route may be the outcome if too much of the easement surplus is required to
be paid to landowners.
For purpose of illustration, consider a hypothetical example where Transpower has
the option of running lines over farmland or over a longer route beside a public road.
The route over farmland would be $50 million cheaper than the alternative,
considering fully the costs of easements. If Transpower are required to pay the entire
$50 million surplus to landowners then it would be indifferent between choosing
either route and may choose the less efficient option.
For efficiency purposes compensation must be somewhere between the costs
imposed on the landowner from the easement, and slightly less than the next best
alternative facing Transpower. Legally Transpower is required to compensate
landowners an amount equal to the cost of the easement. This would still be efficient
if easements are accurately priced. The option of compulsory purchase, asymmetric
<strong>NZIER</strong> – Compensation for transmission infrastructure 13