NZIER report on compensation for transmission infrastructure

5.2 Results
For modelling purposes we assume that annual payments would take effect from
2010 into perpetuity. We consider the net present value of continuous payment costs
and benefits using a discount rate of six percent (the long run risk free rate) and eight
percent (the Treasury rate). The total additional costs to Transpower and landowners
of switching from annual lump-sum payments are shown in Table 3.
Note that we considered costs based on 314 landowners only. Including more
landowners would have little impact on development, management and review costs.
Uncertainty costs facing Transpower would increase but dispute costs would reduce.
The net effect would be small.
These costs, while based on available information and our best judgement, should be
taken as indicative. We can only estimate a priori what the net cost of developing
periodic payments will be, for example.
Table 3 Cost of periodic payments
Net present value to Transpower and landowners at 6% and 8% discount rates
Costs Transpower
$’000
6% 8%
Landowners
$’000
Transpower
$’000
Landowners
$’000
Development 119 0 119 0
Management 258 0 198 0
Review 1,246 0 987 0
Dispute -794 -352 -674 -308
Total costs 829 -352 628 -308
Total net cost both parties 478 320
Source: <strong>NZIER</strong>
With adoption of the assumptions outlined above and a six percent discount rate, it
will cost Transpower an extra $829,000 to give landowners the option of receiving
periodic payments with adjustment every five years, approximately $50,000 per year.
Landowner costs, on the other hand will reduce by $352,000 in net present value
terms, about $21,000 per year.
The effect, considering landowners‟ reduced costs along with the increased costs
facing Transpower, will be a net increase in costs of $478,000, or roughly $29,000
per year. The biggest increase in cost is due to periodic reviews of land values and
operational costs. These costs are borne by Transpower. Costs are reduced due to
assumed lower dispute related costs, benefiting both Transpower and landowners as
a group.
It is possible that Transpower would value the above costs differently than we have,
or include cost items not listed above. We have, for example, possibly overestimated
<strong>NZIER</strong> – Compensation for transmission infrastructure 42