Sunday, April 21, 2013

Mike Butler: Sparks fly in electricity fight

A proposal from Labour leader David Shearer and Green co-leader Russel Norman, announced on Thursday, to bring down power prices, is the latest round in a tit-for-tat political struggle started by the National-led government’s policy of selling assets to keep the ship of state afloat. Labour had joined the Green Party in collecting 320,000 signatures to oppose the part-privatisation of electricity generating companies, and then 400,000 pre-registered for the Mighty River Power float, with 400,000 trumping 320,000.

Shearer and Norman’s joint announcement was aimed at a nerve – everyone would vote for a lighter power bill. They said their plan would cut the nation's power bills by up to $700-million a year.

Under the Labour proposal, the government would buy all electricity generation “at a fair price based on actual cost of production”. The government would forgo dividends and tax revenue from power companies, costing between $60-million and $90-million. Shearer claims this would create at least 5000 jobs and increase GDP by up to $450-million.

The Green Party would allocate to every household a block of low-cost electricity each month from the savings that the new single electricity buyer, named New Zealand Power achieves, saving each family $300 a year. New Zealand Power would have to give priority to renewables, energy efficiency and resilience of the electricity system. (1)

Some background is required. Up to 1987, a government department, the New Zealand Electricity Department, operated almost all electricity generation as well as the transmission grid. Households bought power from the local municipal electricity department or power board.

In a wave of reforms that largely dismantled a costly and inefficient state-controlled economy, the Fourth Labour Government corporatised the New Zealand Electricity Department and formed the state-owned enterprise named the Electricity Corporation of New Zealand in, April 1987. (2)

Many are not aware that life in New Zealand under the state-controlled economy before 1987 has been compared to living in a Polish shipyard. The unions ran the government. Farmers were guaranteed minimum prices. It took about a month to get the state-run Post Office to connect a phone. Permission was required to buy an item from overseas. By today’s standards, choice was severely limited for consumer items. Inflation reached 18.4 percent in 1980 (compared with inflation of less than 1 percent in the first quarter of this year).

The Fourth National Government took reforms to the electricity sector further, from 1993, to introduce competition to the electricity market. This resulted in the Electricity Reform Act 1998 which privatised Contact Energy, split the Electricity Corporation of New Zealand into three competing state-owned enterprises, and required all energy companies to split their retail and lines businesses and sell one or other within a set time period

Electricity generation is dominated by five companies: Meridian Energy, Genesis Power, Mighty River Power, Contact Energy and TrustPower, with the first three government-owned. The current National-led government has started the process of partly privatising (selling 49 percent of) government power generators, starting with Mighty River Power.

Former local electricity supply authorities have been established as energy companies since 1993. There are now 17 energy retailing companies in New Zealand, with Genesis having the largest market share.

Soaring power prices have accompanied the introduction of the competition-based electricity market. The fault with the current market model may be traced to the wholesale market for electricity, where trade takes place at more than 200 pricing nodes across New Zealand every half hour. This auction takes generators’ offers and retailers’ bids, and computes final prices and quantities at each node.

All power stations get paid at the price of the highest bidder. So when an expensive (read coal-fired) station is called upon to generate, the low-cost stations (hydro) make huge windfall profits. (3) Generators may rort the system by withholding supply to drive up prices.

While the wholesale electricity auction system benefits the electricity generating companies, most of which are government-owned, the competition between electricity retailers benefits the customer, as the Electricity Authority’s “what’s my number” campaign has shown. Retailers compete on price and customers can switch retailer to save money.

Political reaction to the Shearer-Norman plan was swift and sharp, but the sharemarket reaction was more telling. Contact Energy shares dropped almost 6 per cent in early NZX trading, with Contact chief executive Dennis Barnes saying it was "hard to see" how it would have justified investing $2.5-billion in new power plants if the Labour-Greens electricity policy had been in place”. (4)

Shearer and Norman are keen to go back to the old government-sets-the-electricity price model without either appearing to be aware of what existence was like in New Zealand under such a state-run system.

Australian Russel Norman, who was born in 1967 and didn’t come to New Zealand until 1997, has had no experience of the world according to Prime Minister Robert Muldoon. Shearer has less excuse because he was born in 1957 and was in New Zealand during that time. Possibly the fact that he worked as a high school teacher sheltered him from economic realities means that Shearer, like Norman, appears to be financially illiterate.

Shearer repeatedly shows himself as a financial klutz. He told Susan Wood on Q&A a couple of weeks ago that one of the biggest problems “is that the exchange rate is so low” when the New Zealand dollar is, at US89 cents, above the usual range of between US40 cents and US70 cents – in other words, high not low. (5)

If you want to talk about a high dollar, it was at $US1.40 through much of the 1960s and spiked back up there in 1974.

Norman has studied politics, not finance or economics, so is flaky on facts. For instance, his claim that a capital gains tax in would bring in $4.5-billion a year is demonstrably false. (6) Since then he has come out advocating quantitative easing (printing money), to join New Zealand up to the race to get to where inflation-ridden Zimbabwe ( 6.5 sextillion percent in 2008) is now at economically, at the bottom.

Has the Shearer-Norman plan trumped 400,000 would-be Mighty River Power investors? The state-controlled single-buyer plan looks like policy on the hoof from two financial illiterates aimed at people vexed by soaring power prices. If this is simply a bid to garner votes while incurring huge cost to taxpayers, it is special interest politicking at its irresponsible worst.

1. Labour-Greens power plan criticised, Otago Daily Times, April 19, 2013.

2. Background to governance and regulation, Electricity Authority.

3. Why electricity prices are too high, Bryan Leyland, NZCPR, March 4, 2013.

4. Contact says 'hard to see' investment under Labour-Green plan, NZ Herald, April 19, 2013.

5. Q+A: Transcript of David Shearer interview, ONE News, April 7, 2013.

6. Russel Norman on CGT,


Graeme said...

This is the conclusion from a blog post by Milford Asset Management.

"In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following; $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises, $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development. In the short term this will not be an issue whilst demand catches up with supply but by the time supply and demand are in balance it will be too late to add additional capacity in a timely manner.

Rolling blackouts anyone?"

Note the extra interest costs are due to higher interest rates because of the political uncertainty such a move would cause.

Anonymous said...

So what are the practical changes that could and should be made so that consumers are not ripped off and power companies still have an incentive to spend money on maintenance and forward planning?

Mike Butler said...

Practical steps to lower the price of electricity: 1. Get rid of the Emissions Trading Scheme, another green policy designed to penalise New Zealanders for producing greenhouse gases, which has pushed up the price of electricity by introducing a surcharge that increased the amount that consumers would pay for power by $400-million. 2. Change the auction system at the wholesale level so that hydro competes with hydro, fossil fuels with each other, and the costly wind-generated with each other.

Anonymous said...

At least Labour and the Greens came out before the shares are sold. I'd like to see changes to remove the gaming and super profit options from the wholesale market including paying everyone the highest price, withdrawing supply unreasonably and the constant revaluation of the assets.
Currently the big government owned generators are basically taxing electricity users through teh back door.