Scoop Election 08: edited by Gordon Campbell

Gordon Campbell on the Labour/Greens plan to cut power bills

April 22nd, 2013

As sure as night follows day, you could bet some financial analyst would see the death of the free market in the plans unveiled last week by Labour and the Greens to put an end to price gouging within our electricity system. Take a bow, Craig Stent of Harbour Asset Management – who managed to assemble almost every known market cliché into one report on RNZ this morning.

The Labour/Greens plan, says Stent, “effectively takes away the free market operation of the electricity market…” It puts a cap on certain generation assets, and worse: “It’s gonna take away the signals to invest when required that a free market takes into account in investing. So the signals aren’t there to invest into the future, should we require more generation.” (Yep, because markets are always so good at setting aside short term profit in the interests of long term planning needs. Makes you wonder how New Zealand ever managed to build its existing system of hydro power. Clearly, those hydro dams must have fallen out of the sky.)

Not that the likes of Mr Stent are interested in any market signals for his clients that aren’t green lights. Evidently, his brand of bold, risk taking investors would have already been unnerved by all this political “uncertainty” – aka democracy – and thus “investors would require a higher risk premium on that listing…” The fact that this sort of stuff can still be said in public 25 years after New Zealand’s experience of the damage done by light handed regulation (in everything from telecommunications to banking to the provision of electricity) shows the level of ideologically-driven idiocy that Labour and the Greens are up against. In everything from supermarket pricing to power pricing, New Zealand consumers have never been exposed to a free market, if that means protection by robust anti-trust mechanisms that a genuine free market requires, and which New Zealand has conspicuously lacked. The only freedom at work here has been a licence to gouge profits from a captive pool of consumers – and it is that unjust, woefully inefficient system that the Labour/Greens electricity plan seeks to address.

In case you missed it last week, what Labour and the Greens are proposing is to create a new Crown entity – called NZ Power – that would negotiate prices and buy electricity from generators on the public’s behalf, in much the same way that Pharmac successfully deals with drug companies in order to purchase medicines and essential health services. The outcome, Greens co-leader Russel Norman says, would deliver savings to households of about $300 a year on average in energy costs. (Not an earthshaking gain: that’s roughly $6 a week.) According to the financial experts at BERL this will translate into a $450 million annual boost to the economy, and 5,000 additional jobs.

If anyone still needed a rationale for why an agency such as NZ Power is needed, this was provided on the weekend in an excellent NZ Herald column by business commentator Bernard Hickey who provided evidence that the market system that is supposed to generate competition and rein in power prices simply hasn’t been working for New Zealand households. True, those price hikes may no longer be occurring at the rampant 8% average annual increases racked up during the decade to 2008 – but as Hickey adds, they have still been running at roughly four times the general rate of inflation for the past four years. The difficulty of holding the current – and previous – governments to account for this situation was demonstrated last week in the House by this fiery exchange – the transcript of which incidentally, demonstrates once again how hopelessly out of his depth David Carter is, as the new Speaker.

As the housing plans released late last year also served to do, the NZ Power proposal creates a clear, bright line of difference between the centre left and centre right on an important pocketbook issue. By adding NZ Power to the political equation, the Opposition not only blindsided the government but has offered voters a clear choice. Currently, the government is committed to an asset sales programme in which only a small and relatively wealthy minority of voters can afford to invest, and that delivers into private hands a greater ability to set power prices and rake in the subsequent profits. The Opposition proposal by contrast, has painted itself as an attempt to rein in – on behalf of the majority of voters – the super profits being racked up by the energy companies at the expense of power users.

As Stent and others have pointed out, the fear among professional investors about the NZ Power proposal has already wiped a significant amount off the book value of some energy companies, and this is likely to affect the likely value of shares in Mighty River Power. Too bad. To many ordinary New Zealanders, such impacts indicate the artificial value that they have been sustaining with their power bills every month. Few will shed tears if an ability to claw back some relief from electricity price gouging should ultimately cause a decline in the profit taking opportunities for private investors.

This raises a familiar political point that was usefully re-stated in Hickey’s column – namely, that power price rises might once have been grudgingly accepted, when they were a virtual tax that went straight into government coffers and paid for essential social services. Yet now…the asset sales programme has only served to erode that justification, because it will divert a significant slice of state energy company profits into shares, dividends and boardroom salary packages. That’s a much more difficult proposition to sell to voters.

One should also note that the asset sales programme is, at this point, a total shambles. Long ago, the government lost the argument for this selldown, on any grounds of economic efficiency. At the outset, it was always going to be a marginal matter whether it would be cheaper to borrow the money rather than sell the assets – but now, the government doesn’t even try to make a case based on the actual and opportunity costs involved in such a comparison. We’re talking about losing hundreds of millions in this ideological exercise.

Still, for individual investors, are shares in Mighty River Power a good buy – and at what price? And the answer is: no one has a clue. On the weekend, business commentator Rod Oram tried to get some informed advice – and failed spectacularly to do so. If someone as plugged in as Oram can’t get a reliable steer….then it goes to show that the Key government is really throwing all those prized Mum and Dad investors to the wolves of fortune.

ENDS

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    1. 5 Responses to “Gordon Campbell on the Labour/Greens plan to cut power bills”

    2. By clairbear on Apr 22, 2013 | Reply

      If this idea of the government becoming the single purchasing organisation then – please forget about electricity – and concentrate on food. If you look at food inflation – it is way above power inflation, and we spend more money on it, so if Labour an the Greens are interested in saving NZdrs money – start there. Further Rent there is another one we spend heaps on rent and rent inflation is also high.

      There are a raft of areas that this type of government intervention would be beneficial, so I am not quite so sure why they picked this one – or is there something else going on??

      If this is really such a good idea let’s apply it to everything.

      Housing would be a great one – everyone would have to sell their houses to a central government buying agency and then they could resell them to potential buyers. Then they could even out the price differential for say Auckland – they could set a single pricing for land size and to that you could add a single pricing for floor area- This would drastically reduce the price of houses. It would be great. Imagine how you could redistribute wealth – set prices that are above the low cost houses and way below the expensive ones and you could just move wealth from the rich to the poor over night

      Come on think big – apparently this is a great idea, why limit it to power!!!

    3. By geoff on Apr 22, 2013 | Reply

      Great article, Gordon. Yours and John Minto’s on thedailyblog have been been just about the best articles on this situation so far.

    4. By Elaine Hampton on Apr 22, 2013 | Reply

      Clairbear

      Very clever attempt to muddy the waters and ignore the price gouging of the electricity companies cartel
      Let’s just start with electricity

    5. By Murray Grimwood on Apr 23, 2013 | Reply

      This is a relativity scramble in a zero-sum game, but the bigger picture – and the reason the would-be-wealthy are reduced to coveting such targets – is that indefinite economic growth was never possible on a finite planet.

      When will a senior journo investigate the link between energy, resources, pollution and wealth-potential?

      Grant Robertson (Morning Report 23/4) aims for ‘economic growth’, as does Bill English. Come on, NZ media, learn about growth, doubling-times, Energy Return on Energy Expended, efficiency potential. Any dollar not underwritten by energy having been expended, is not underwritten – which is why we see ‘capital destruction’ globally.

      Crossing the graph of energy volume produced, with one of energy quality, then correcting for the state of efficiencies, gives you the work do-able globally. Too simple. Money printed/charged-for beyond that underwrite, must devalue via bidding.

      Is it that hard to understand?

    6. By Joe Blow on Apr 24, 2013 | Reply

      @ clairbear

      This is a very specific answer to a problem of a particular market. In short, competition does not work well in a market governed by a network (telecommunications being another example). This proposal is based on actual examples successfully employed in Canada and California after market corporatisation didn’t work. In NZ it hasn’t mattered until now because the profits have gone back to the government coffers as most of the power companies have remained SOEs (contact excluded).

      Unlike with electricity, the food market is not made up of national network and comprises many different markets, for example local growers (fruit and vegetables) are often being shafted by the distributors before the produce even gets to Progressive and Foodstuffs. Of course dairy and Fonterra are a whole other kettle of fish…

      In short, there’s no one size fits all answer for every over inflated market in New Zealand…

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