NZIER report on compensation for transmission infrastructure

Some authors suggest that that the option to compulsorily acquire land strengthens a
utilities‟ bargaining position, possibly distorting the sales price of easements. 6
Although Transpower is required to compensate landowners for compulsory
purchases and has seldom exercised this right, 7 it is seen by some as a „backdrop‟ to
negotiations. Once Transpower have been cleared to build an easement across a
landowner‟s property that landowner must either sell Transpower the easement or
sell their land.
On top of this, easement sales‟ prices may be influenced by the effect of asymmetric
information on negotiations. Transpower is a repeat player in the negotiation process
with considerable institutional knowledge from previous negotiations with other
landowners. Landowners, on the other hand, are generally fragmented and
infrequent players in easement negotiations. They are not as well informed as
Transpower, in part due to Transpower‟s requirement that confidentiality agreements
are signed when easement settlements are reached.
How easements are priced has implications for not only the affected landowners but
also the electricity market and all New Zealanders. Underestimating easement values
could lead to inefficient choices on how to transmit electricity. Overvaluing
easements would also impact on the wider community, as end users would pay more
than necessary for electricity. Overvaluing may be more efficient than undervaluing
easements, however. Being able to spread the costs of the wrongly estimated portion
of easements over millions of end users, rather than a few hundred landowners,
would probably lead to fewer inefficient decisions.
1.2 Report structure
Federated Farmers and landowners would like a better understanding of whether
appropriate prices are paid for easements. They have asked <strong>NZIER</strong> to consider how
landowners are compensated for Transpower infrastructure from an economic
perspective. The problem is defined below in section 1.3. We consider easements in
the context of efficiency and equity, described in section 2. To provide a benchmark,
in section 3 we review international literature to look at how compensation is
determined and awarded in countries similar to New Zealand. Section 4 looks at the
key components for accurately assessing easement costs in New Zealand. Section 5
looks at the costs and benefits associated with re-negotiating easements with
periodic as opposed to lump-sum payments. We consider transparency and
collective bargaining in section 6 and summarise the issue in section 7.
6 See for example Hutchison and Rowan-Robinson 2000.
7 According to Transpower staff during a meeting mid 2009.
<strong>NZIER</strong> – Compensation for transmission infrastructure 8