319 million reasons not to part-privatise our power companies
There are at least 319 million reason why it is sheer madness for National to be considering part-privatisation of state-owned power companies,
Acknowledgement for above media reports: Radio New Zealand
The half year (not even a fullyear!) profit for the above three power SOEs is: $319.5 million.
Combined dividends paid the the government will be: $224 million.
If 49% of all three SOEs is sold to private investors, the State (ie, You and Me) will lose out on approximatelt $110 million.
That will be $110 going into bank accounts of institutional investors, or the pockets of wealthy New Zealanders with sufficient income to buy shares.
It will mean a drop in government income.
Worse still, going by historic events in the late 1990s when the ECNZ (Electricity Corporatrion of NZ) was split up, and the newly formed Contact Energy was split off and fully privatised, power prices will continue to skyrocket,
Privatisation will not mean competition resulting in cheaper power prices any more than competing fuel companies are giving us cheaper petrol prices.
In fact, as Economics Professor, Geoff Bertram said on 13 February 2013, at an anti-asset sales rally in Wellington,
“… It’s my view that probably the most important political consequence of the part-privatisation of SOEs is to place private investors in those enterprises and thereby immunise them against possible future policy that might reduce their value.
And since I think an important part of an improved government policy would indeed reduce their value, I am opposed to the asset sales…
…The companies have a very high valuation. The reason why they have a very high valuation is that they have successfully participated in a long-running rort to extract cash from residential electricity consumers by the inexorable driving up of prices of electricity.
That rort, has been possible, because government policy has allowed and has indeed supported the emergeance of a cartel of five, large, vertically-integrated, generator-retailers – three of whom are SOEs – which have been able to operate without any effective regulation, at the expense of consumers who were too vulnerable to protect their interests against price hikes.
And if you looked at the tracks of electricity prices over the last 20, 30 years you will have noticed that large industry has protected itself very successfully; commercial electricity buyers have done fine; residential who are the dis-organised, unrepresented, undefended, captive group of customers have seen their prices go up in real terms 100% since 1986.
And the main consequence of the electricity reforms has indeed been that doubling of the cost of electricity to ordinary households.
That’s a major cause of energy poverty; it’s been an important part in the growing inequality of income and wealth in this country; and it’s something that a socially responsible government would, in my view, be taking serious action to reverse.”
Geoff Bertram continued,
“Just to put that doubling of the residential price in context. New Zealand’s pretty much on it’s own in the OECD and if you look at the figures for other countries around the OECD, from 1986 to the present, the price of electricity to residential consumers in OECD Europe, in Australia, and in the United Kingdom, is still the same as it was in 1986. In the United States, Japan, and France, prices are down 25% , compared to where they were in 1986, in real terms. In South Korea they’re down 50%, compared to where they were in 1986.
New Zealand is the only only OECD country that has gone out there and driven up electricity prices 50%. We’re also pretty much the only country that doesn’t have a regulator in place, and where government doesn’t have any particular social policy relating to the pricing of essential services to the public.”
Prof Bertram explained,
“And here’s how it works.
You take a bunch of assets with a given value, and you look at the existing price, to consumers of the product, and you say “well look, we can get the price up”; so you project that higher price; you capitalise that; and then if you can get the price up the asset will be worth more; so then you re-value the asset; and then you go and use the higher value of the asset to justify raising the prices, and then you repeat.
And this is the circular process which has been going on in New Zealand now, in electricity, for more than a decade. It is completely legal under New Zealand law.
It is not illegal to profiteer or to gauge captive customers in this country. [In] very few countries is that true.
And it’s consistant with New Zealand’s generally accepted accounting practice which basically tells you that there’s a rotteness at the core of accounting practices in this country.”
And added this shocking insight,
“Here’s the problem. Electricity was once an essential service provided to households at the lowest price, consistent with covering the industry’s costs.
Since 1986 the sector has been corporatised and part-privatised, and it’s pricing has been driven by the quest for profit by giant companies that have the market power to gouge their consumers.
As the owner of three of those companies, the New Zealand government has therefore become a predator. And now the Treasury wants to cash in on that rort by selling out half the government’s stake.
What that means in terms of the options for the future for government to turn around and come back from the predator model and return to a social service approach for energy supply, is being closed off.”
“But if you want to deal with energy poverty and get kids out of hospitals with asthma and other respiratory diseases and so on, one of the really good things that you can do is get cheap energy into New Zealand households and that would be sustainable on the basis of the current government owned assets.
About 300 kwh free. [But if] you sell Mighty River and what’s feasible comes down to 200 [kwh]. You sell Genesis and what’s feasible comes down to 100 [kwh]. You sell Meridian and it’s gone…
What I’m saying is the contract that supplies the Rio Tinto smelter down at Bluff, the old Comalco contract, is the contract New Zealand households should have had from the start.
And it still could be done.”
See previous blogpost: Wellingtonians rally to send a message to the Beehive! (part rua)
As Radio NZ reported on 21 February,
“Electricity prices paid by Mighty River customers rose 2% over the period while costs fell 22%.”
Which leads us to these points to consider,
- Despite a glut of electricity, prices continue to rise. There is price-gouging going on by all power companies, whether State Owned or by privately-owned Contact Energy. There is no competitive force driving prices down. There is no indication that part-privatisation will create any competition.
- At least state ownership means that most electricity profits stay in New Zealand and contribute to the State, to pay for health, education, roading, etc. However, one wonders if this sort of punitive, indirect-taxation, on low income families is fair, whilst more affluent households can afford insulaion, solar power, and other energy-saving strategies.
- As Prof Bertram maintains, partial privation will most likely close off future progessive governments’ abilities to reform the electricity industry and return to a social service approach.
See also previous related blogpost – with Max Bradford’s response on this issue: History Lesson – Tahi – Electricity Sector “reforms”
Meanwhile, some of our past political leaders are waking up to the realities of historical state asset privatisations,
Better late than never?
Nah. Better now than later.
These mistakes are too expensive and we all end up paying.
= fs =
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