NZIER report on compensation for transmission infrastructure

7. In summary - efficient compensation
The amount of compensation paid for easements for transmission facilities across
private land is not just a matter of fairness. If landowners are paid less than the costs
they incur, easements will be under-priced and may lead to inefficient choice of
routes for new lines.
In a freely functioning market of willing buyers and willing sellers negotiations
between the parties should lead to efficient settlements, but there are a number of
factors that make easement purchases an unusual transaction:
Transpower is aware of the prices paid for previous settlements but landowners
are not, due to Transpower‟s requirement that confidentiality agreements are
signed when landowners sell easements
Easement values and compensation amounts are based on estimated valuation
changes formed with limited comparable sales data to draw on
Transpower has the power, although seldom exercised, to force unwilling
landowners to sell easements which changes the dynamics of negotiation and can
distort the settlements reached.
These factors combined skew negotiations in Transpower‟s favour, suggesting that
the prices paid for easements may be less than the full costs easements impose on
landowners.
If easement prices are under-stated then Transpower will be encouraged to use
easements where there may be alternatives that involve less real resource cost. To
illustrate, if Transpower are trying to minimise the cost of easements they will run
lines over productive dairy farm-land rather than less productive land, if it is a shorter
route and they can ignore the costs imposed on land-users.
This issue of inefficient compensation for transmission routes is not unique to New
Zealand. The international literature suggests that it is dealt with in different countries
through two channels. A number of countries require utilities to provide compensation
that is greater than the estimated costs of easements. As well as this, in many of the
same countries compensation is paid periodically with options for the amount to be
adjusted. Both of these features address the possibility of easement prices being
understated and the related issue of inefficient transmission infrastructure.
It is also possible to overstate the price of easements, although this would not create
the same inefficiencies. In the event prices were overstated and compensation
provided accordingly, then the overstated portion of compensation would be spread
thinly across millions of electricity users (as transmission charges) or across
taxpayers at large (as lower dividends to government). If easements are
undervalued, however, a relatively small group of landowners would bear the whole
cost difference, possibly encouraging inefficient behaviour changing and forgoing of
productivity improvement.
<strong>NZIER</strong> – Compensation for transmission infrastructure 45