Jane Clifton: Power politicsby Jane Clifton
There are no innocent parties in the posturing over our costly electricity.
How many supply-side economists does it take to change a light bulb? None. If market conditions are correct, the bulb will change itself. Alternatively, given the current pitched battle over this country’s electricity system, New Zealanders would be well-advised to avoid light bulb dependency altogether and get used to living in the dark.
The claims and counterclaims are so stark, it’s hard for voters to figure out who to believe. Have we really been cynically gouged by electricity companies for the past two decades, as the left says? Or is this pricing system the only thing standing between civilised modern life and regular Third-World blackouts, as the right insists?
The Government’s problem is that with respect to the former question, the statistics tell the story as plainly as a Janet and John. The price of power has outpaced the rate of inflation by 70% since the Max Bradford reforms of the 1990s. Admittedly, the most severe price rampage was under Labour, which tampered with the Bradford model, making it even easier for power suppliers to charge at will and – inconveniently for its sanctimonious new policy position – it was only too happy to hook out strapping dividends from the companies, effectively an extra tax on power consumers.
Despite knowing this, National ministers have been trying, straight-facedly, to argue that New Zealanders haven’t been overcharged. If you were to inspect their hands, you’d find incipient arthritis of the knuckles from all that behind-the-back finger-crossing. The mere fact that this Government conceived the What’s My Number? campaign to jolly consumers into shopping around for cheaper power was an admission that the industry was overcharging. The campaign’s success – it actually depressed the CPI – revealed some households can make hundreds of dollars in savings, underlining fathomless discrepancies in what companies are charging.
If you tried to explain our electricity system to a foreign tour party, they’d think you were pulling their leg. For 20 years, the pricing mechanism has been based on a spot market, which enshrines not the cheapest but the most expensively generated electricity at any given time. This high-tide-mark pricing is fed to consumers through a vertically integrated market of several interchangeable companies, created by and subject to tinkering and redirection by politicians. There are only just starting to be new players in the industry, but they’re too puny to disrupt the comfy status quo.
The technical term for this could be oligarchy, cartel or simply bonkers. What kind of competitive market is it when the demand for the product has been flat for years, and is expected to remain so for years, yet the price keeps going up? It’s not because of capital-hunger, either, because we’re pretty much up to snuff with generation capacity for the foreseeable future. There could hardly be a clearer market signal for cheaper power, yet no one, be they friend or foe of the current system, is predicting a price decrease or even a levelling-off anytime soon.
THE MYTH OF COMPETITION
However barmy many people will find the Opposition’s alternative, it does force us to confront the myth of competition. In reality, these companies, like our supermarket duopoly, trade a semblance of merely ornamental competitive discounts. The market is not really a market, the more so because as much as households and businesses use power increasingly efficiently, none have any choice but to use it.
Sure, we have no choice but to eat and wear clothes, either. But supply of food and frocks is incredibly diverse, and if pressed we can even grow or make our own. Few of us can generate our own power (though there’s probably steampunk potential in what comes out of our ears when the power bill arrives each month).
However, Labour and the Greens haven’t answered the next important question: has the extra money we’ve paid become central to ensuring continuity of supply and maintenance of reliable generation capacity?
Luckily for the Opposition, the Government can’t answer that question either. All we do know is that both Labour and National governments have been skimming an average of $300 off each household’s annual power bill in dividends from the power companies. The rest of the price margin may or may not have gone substantially to capacity-building and maintenance. It’s hard to tell. The Labour-Green plan is to ration capacity-building money back to the companies through its “fair price” mechanism. Nice idea, except that when you think about the track record of politicians and bureaucrats in assessing either the fairness or the pricing of anything, it’s hard to resist a reflexive urge to hide under the bed.
At most people’s end of the light switch, the PR so far appear to be on the side of Labour and the Greens. Mighty River Power directors’ self-awarded fee increase has only reinforced the perception of fat in the system. The still-rising price of power is going to make for a fascinating run-up to next year’s election.
THE ALBANIAN CONNECTION
However, both sides of the House had better watch the rhetoric, because our international reputation as a place to do business is at stake. It is eminently reasonable as a political tactic to portray the Labour-Green policy as scary old cloth cap, tin mug, dancing Cossack nationalisation. But, despite National’s histrionics, it’s not Albanian to restore the national grid to the status of a public utility. Our electricity system is an irreducible natural monopoly and it’s fair to say that we’ve had 20 years to prove to ourselves that we can’t figure out how to make it into anything else.
Equally, the Opposition has just wiped massive value off the power companies’ actual and putative market valuations – and on the brink of several public partial floats. It’s absolutely correct to argue that much of this value has been achieved at the direct expense of households and businesses through artificially high power prices. But it’s not a reassuring signal to the international investors we desperately need to support our economic growth that our politicians are willing to smite companies’ entire business plans at a stroke.
Still, the debate has put National’s mixed-ownership model under a useful new lens. It’s no secret that, even given their untrammelled pricing, the power companies regard their future growth path domestically as being nearly tapped out. Energy efficiency and alternative power sources are on the up. Their real growth potential lies overseas, where their expertise in areas like geothermal development could be making us useful foreign exchange. Yet the Government’s plan was not to optimise this growth potential by reinvesting float money in the companies, or even to retire debt, but to spend it on schools and hospitals. This is pure politics and almost nothing to do with sound business or economic strategy.
It’s true, too, that the Opposition’s policy announcement has spiked the glamour of what had promised to be a mum-and-dad share-buying frenzy. But just as National fairly warned before the last election that it would float these energy companies, so do Labour and the Greens have a duty to warn voters that it would recentralise the industry, derailing whatever business trajectories they happen to be on at a change of government.
Perhaps the next move should be from the power companies. Now self-preservation is starting to nudge out profit as their main motivation, wouldn’t it be funny if they suddenly, miraculously found a way to bring power prices down? This could happen … but only after they patented electrically rechargeable jet packs for the pork industry.
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