Dr Bryce Edwards: Politicians enabled the “Big Four” oligopoly power companies to profiteer

First, it was the banks and supermarkets that were ripping off New Zealanders. Now, the power companies have been added to the list of price-gouging cartels.

With electricity prices skyrocketing, there’s a lot of debate and disagreement about whether this amounts to a “crisis”, a “disaster”, or just a “crunch”. Certainly, if it’s not yet an “energy crisis”, it’s turning into some sort of “political crisis” in which politicians struggle to work out how to fix yet another case of oligopoly control.

The Government against “Big Power”

Public anger at the big electricity companies is quickly being politicised. Deputy Prime Minister Winston Peters has been leading the charge, saying last week that “There is a serious crisis” and “we have a disaster on our hands.”

Peters has accused the big electricity companies of being anti-competitive and profiteering from an unfair advantage over the public. He suggested that the coalition government would have to reform the energy sector significantly. A formal inquiry might be ordered to examine how electricity companies can be forced to generate more power and sell it more cheaply.

The New Zealand First party is channelling its more anti-establishment traditions and going to war against the “Big Four” power companies, Meridian, Contact, Genesis and Mercury. These companies, known as “gentailers”, both generate electricity and also sell it on the retail market.

Like Peters, Resources Minister Shane Jones is also labelling the problem as “profiteering”, and last week, he said that the big electricity companies are “probably the most powerful economic institutions in New Zealand, beyond the supermarkets and the Aussie banks”.

His party has always had a problem with the electricity sector in New Zealand and doesn’t believe that the official regulators have much impact on keeping the companies honest. Hence, Jones said last week the public can’t have any faith in the government’s electricity competition watchdog, the Electricity Authority, calling it a “chocolate teapot”, i.e. useless.

It's not just NZ First pressuring Big Power

Others in the coalition government are also positioning themselves against the big power companies, but less combatively so. Energy Minister Simeon Brown has called the energy giants in for a meeting to explain his concerns, saying he’s worried that the public is being price gouged. He suggests the ball is in their court to prove otherwise. He is reported today as “losing patience” with the big power companies.

Brown is also pressuring the Electricity Authority and the Commerce Commission to intervene. An official directive to the Electricity Authority is apparently being drawn up in the Beehive, which will say the Authority needs to focus more on bringing prices down.

Finance Minister Nicola Willis, fresh from the National Party conference where she blasted the big four Australian banks for being a “cosy oligopoly”, has ordered Treasury to give her an urgent briefing on how to fix the crisis, suggesting that she thought that the market needs to restructuring via government intervention. She is also rumoured to be drawing up plans for MBIE to lead a more extensive review of the industry, again focusing on what significant reforms are required.

Such reforms could end up rolling back some of the “Max Bradford Electricity Reforms” of the 1990s, which resulted in privatisation and only light regulation of the energy companies. The Act Party would be uncomfortable with such moves but, at this stage, agrees that there is a problem.

There’s no doubt that the Government will have to do something significant. And today, the head of the Major Electricity Users Group, John Harbord, has spoken out about his dealings with the Government over the crisis, saying, “I think we're going to see some pretty significant announcements from the Government this week.”

The Government’s controversial Fast Track Act might also be used to help increase power supply. The Post reports today that the Government is considering inviting the power generating companies to bid to build and operate a new thermal power station. Resource consents would be fast-tracked by the Government under its new rules. This would help meet peak electricity demand in crises without the state having to invest itself.

How the Big Four power companies profiteer

So, are New Zealanders being ripped off by the power companies? Increasingly, the consensus seems to be “yes”. One of the leading experts on the electricity industry, Victoria University economist Geoff Bertram, told RNZ Morning Report last week that the big electricity companies are operating like a cartel. He explained: “That is to say they're a bunch of companies with enormous market power to exploit situations such as the present one and that market power is exercised at the pursuit of profits, which is what these companies are set up to do.”

The problem, according to Bertram, is that the electricity market is “not a competitive market, this is a market where scarcity goes straight through to profiteering.” Essentially, the big power companies together have monopoly control over the industry, where they can charge high prices to power retailers.

The Big Four have about 85 per cent of the market to themselves. Through this, they are able to prevent competitors from establishing themselves as generators or successful retailers. Then, according to Bertram, the Big Four can essentially “price gouge”, manipulating the power price for the public. This is seen as a misuse of market power.

Excessive mega-profits

The Big Four are making incredible windfall profits. In 2022, the combined earnings of the four were $2.3 billion. This increased to $2.7 billion in 2023 – their biggest-ever single-year rise in earnings.

There’s a growing consensus that these profits can be regarded as “excessive”. They can make these because the companies, unusually, are allowed to control both the generation and retail of electricity.

Under this configuration, the Big Four choose to make their money in generating power with high wholesale prices, and the retail businesses they own are barely profitable or indeed subsidised by the generating side of the company. This model helps prevent other potential independent generators or retailers from entering the markets.

The market structure set by the Government incentivises crisis

Shane Jones says there are “some significant deficiencies” in the electricity market structure. And increasingly, this is becoming the political consensus.

At the centre of the market failure in electricity is the failure of the power generator companies to build more power stations, especially using renewable energy. The current pricing structures for power are highly complicated, but they essentially incentivises the generators against creating more supply.

This is because the “just-in-time model” determines the price that the generators earn. If more power supply is added, it drives down the unit price that all the generators receive. They, therefore all want to restrict how much power capacity is in the system, pushing up the prices they receive. There are significant pricing disincentives for the generator companies if “over-supply” of electricity occurs.

According to Consumer NZ’s Jon Duffy, “With our current market structure, gentailers are most profitable when new generation is delivered late rather than early. We are concerned that the current market structure rewards scarcity in the form of large profits to gentailers, especially if this is a reason as to why the industry has not delivered the investment into new power stations to meet demand, and protect consumers.”

What restructuring or new regulations are coming?

In the weekend, former Finance Minister Steven Joyce said that the electricity market “has been a slow-moving train crash for some time” and he proposed significant changes. His main argument is to break up the current market, perhaps along the lines of the changes to telecommunications when Telecom was broken up.

However, Joyce is also a corporate lobbyist, and his company not only represents local energy companies but also a major multinational electricity company that is trying to break into the New Zealand market. So this has to be taken into account when considering his views.

He is correct, however, in drawing attention to the lack of regulation in the electricity sector. Joyce points the finger at both current state regulators as unwilling to push back against the Big Four. He agrees with Shane Jones’ characterisation of the Electricity Authority as useless (“almost supine”) and suggests that “inertia seems to be its middle name”.

Joyce says: “There is a range of regulatory tools available, from transparent pricing between the gentailers’ generation and retail arms which is available to all, through to operational separation, or full structural separation”.

Other smaller power companies want the more radical reforms pursued. Kiwi Electric’s CEO Luke Blincoe says the breakup of the retail and generation arms of the Big Four needs to be “executed urgently”. And yesterday, he was reported saying that “Telecommunications reforms in New Zealand already provide a clear blueprint for efficient, well-targeted regulation that benefits consumers”.

Could some form of re-nationalisation also be on the table? New Zealand First has long promised to carry out some measures in this regard, including a pledge to buy back the shares that the John Key government sold in SOE power companies.

Leftwing political commentator Steven Cowan has drawn attention this week to the argument that the market isn’t working. He says, “The justification for the privatisation of the energy industry was that it would introduce competition, encourage investment and lower consumer prices. None of that's happened.” He advocates that New Zealand needs power companies “run in the public interest, instead of in the interest of profit-making.”

Similarly, documentary-maker Bryan Bruce explained yesterday how electricity, before the early 1900s, was in private hands “before the government decided the generation and distribution of electricity was something it needed to own and control in the public good”.

For much of the twentieth century, the whole power network was publicly owned, operating for the benefit of all, and with power prices wholly controlled by the government. Privatisation in the 1980s and 1990s ended all that, so that “the planning and construction of new generating stations is now in the hands of private enterprise”.

Political inaction

Over the last two decades, there has been a lack of political will to fix the problems in the electricity market. Labour once talked about introducing some radical reforms, but once in power, from 2017 to 2023, Megan Woods did nothing “transformational” in the slightest. And now, Labour has gone quiet on the problems in the electricity market. Although the other opposition parties – the Greens and Te Pati Māori – are equally silent, distracted by other issues.

One reason the politicians are reluctant to fix the problems in the current market is that those in government benefit from the problem – the state partly owns the big power companies, and hence, the excessive dividends have been helping finance ministers bridge their spending deficits. As Electric Kiwi’s Luke Blincoe says, the politicians in power are the “single biggest beneficiary, by way of dividends”.

Damage of broken market and high prices

The wholesale electricity prices charged by the generating companies are currently said to be the highest in the world. This is because prices have recently spiked above $800 a megawatt-hour after normally being about $150 per megawatt-hour in recent years.

The current result is businesses being charged skyrocketing prices for power, with some having to close down production. Already, some factories have paused operations, and others have laid off workers – especially timber mills and pulp plants. There will be plenty of flow-on results for the economy and society.

It’s unsurprising that businesses see this as a “crisis”. For example, Open Country Dairy, the second-biggest dairy collective, yesterday said New Zealand is “sleepwalking into an energy crisis”. Some independent power retailers are also signalling alarm, with one stopping from taking new customers.

Will politicians be pressured to take radical action?

The electricity crisis is not about to go away, and it will continue to be a “political crisis” for months, if not the next year or so. While the wholesale electricity prices are currently impacting those businesses that buy power on the fluctuating market, this will very soon flow through to domestic households. Some in the industry say that ordinary consumers should brace themselves for increases of 25 to 40 per cent. This will badly fuel the existing cost of living crisis, continuing to make it the number one political issue.

Furthermore, over the following months there might well be power blackouts. Transpower is already planning to move the country into “alert status” and begin publicity campaigns to encourage the public to use less power. Meanwhile, the water of the power generation lakes is dropping to dangerous levels.

Coinciding with this is the upcoming announcement of mega windfall profits by the Big Four power companies. In six days’ time, Contact will announce its earnings – expected to be about $668m, and handing out significant dividend payments to shareholders. One day later, Mercury is scheduled to announce earnings of $883m, followed by Genesis two days later with $406m, and then Meridian is due to report about $904m six days later on August 28.

A combined profit of $2.861bn this year – or about $7.8 million in profit each day – will be a very inconvenient truth dropping into the debate just when the public will be focusing on the need for politicians to intervene in the market in favour of the public. Therefore, the National-led Government will be very keen to show that they are on the right side of the debate, fixing the problem.

As economist Geoff Bertram says, there is good reason to blame the Big Four energy companies – they are oligopolies, acting like a cartel to price gouge consumers while failing to invest in the necessary infrastructure for a modern country. But it’s the politicians that have let them do this. Bertram says that it is Parliament that legislated and maintained the current market failure and "governments that over the years have systematically failed to fix it".

Dr Bryce Edwards is a politics lecturer at Victoria University and director of Critical Politics, a project focused on researching New Zealand politics and society. This article was first published HERE