NZIER report on compensation for transmission infrastructure

Figure 2 The effect of compulsory purchase on
negotiations
$ Cumulative
transaction
cost
Hold-out a d
Price
Backstop c
Price
Source: <strong>NZIER</strong>
b
0 Limit* Limit
Time & transactions
In Figure 2 the transaction costs are depicted as a cumulative line (i.e. the critical
issue is the vertical position of points on the line, not the area under the line). The
mirror image of that cumulative transaction cost line – ab – represents the value
obtained from realising the hold-out price after increasingly protracted negotiations:
at zero transaction cost the full hold-out price is received, but the net return then
diminishes as transaction costs rise. In the presence of a back-stop price it is the
difference in the net hold-out price and the back-stop that determines the limit to
which it is worthwhile to pursue the hold-out price. In Figure 2 that limit is determined
by point c when there is a back-stop price and by point d when there is no back-stop.
So the threat of compulsory purchase can be expected to shorten landowners‟
willingness to negotiate and result in them settling for less than they would prefer in a
negotiation unconstrained by compulsion.
How much that happens in practice is a moot point. Transpower depends on its
relationships with the owners of lands it crosses over the long life of its infrastructure,
and it is not in its interests to treat them badly in the negotiations: aggrieved
landowners can be an irritant on the smooth running and maintenance of lines for a
long time (e.g. by obstructing access with inadvertently locked gates or frisky bulls in
paddocks that maintenance personnel must use). As Transpower can pass on the
cost of its easements to its customers and still recover its Weighted Average Cost of
Capital it has another incentive not to minimise easement payments.
The possibility that Transpower may pay generously to secure easements, or
purchase them earlier than would be required for an optimal acquisition programme,
is recognised in recent rule changes. Now Transpower is required to obtain approval
before an easement can be introduced in its capital base, from the Electricity
Commission (on major new investments), the Commerce Commission (for minor
investments) or a client (to pay the bill for an easement).
<strong>NZIER</strong> – Compensation for transmission infrastructure 15