Energy shakeup looming

The DomPost Business section leads with a discussion of what national is likely to do with the imminent shakeup of our energy sector. It amounts to privatisation by other means, and sets it for a complete government sell-off to foreign investors in 2011. (No-one else could afford the $12 billion asset!) Re-combining Mighty River Power, Genesis and Meridian would create a state owned powerhouse, if you will excuse the pun.

Selling off 20 percent now to private interests and the Super Fund would seem very harmless right now, but would be the slippery slope to a full sell-off in 2011. The irony here is that the arguments that are being put forward for reconstituting the heart of the ECNZ are the very same ones that were used to justify breaking up the world’s second most efficient electricity system back in 1992 – it would be more efficient and it will lower power bills. The arguments are even being put forward by the exact same people!

Once again we will watch a repackaging and re-branding exercise, done in the name of economic efficiency, which will transfer just a little bit more of the public’s asset to the private sector for the long term, while bleeding enormous transaction/marketing costs to the private sector in the short term.

There is some sense in putting the generation assets of our closed electricity market into one basket, as different generation types could then be used (as they used to be) to balance one another rather than to compete in an uneven manner. That was the valid argument for not breaking up ECNZ in the first place.

What I fear from this proposal, aside from the usual creeping privatisation, is that it’s not just generation assets that will be combined, but retail too. While there is an argument for putting all of Humpty Dumpty’s pieces back together again, doing only half the job is to strip our faux market of what little competition it has. This would be a disaster. Please choose. Either a true market based system or a monolithic government monopoly (or a public trust monopoly, heavily regulated), please, not some half baked nonsense just like last time.

It is for these reasons that I oppose what is being proposed. It is being done for the purposes of selling assets rather than improving the market or the outcomes for consumers, and for this it should be rejected out of hand.

The article is a classic case of double speak. Several times it insists that the moratorium on new baseload thermal generation must go, all the while stating categorically that new thermal generation is not economic. So why the rush to lift the moratorium? And while we are all being primed for the new-right paradigm shift, we have that iconoclast Brian Leyland throwing in a few climate change denying statements as well. (Sorry Brian, the warming trend continues.)

It is also very telling that Genesis is dead set against any merger. Their Rodney Station proposal is such an uneconomic fool’s errand that any new board would squash it like an ant. That would prove too embarrassing for the existing board and former CEO Murray Jackson.

A shakeup in the energy sector is certainly coming, and not entirely unwarranted. In typical National Party fashion, we’ll do the wrong things for the wrong reasons, and the little guys will pay.

28 thoughts on “Energy shakeup looming

  1. The article is rather slanted. There are four references to Labour’s 10 year ban on new coal or gas fired power stations without any mention that the ban applies only to base-load power stations and not to peaking stations, and in any case allows for exceptions for national energy security.

    It makes me wonder how “independent” Bryan Leyland actually is?

    At least Contact Energy seems to be showing some good sense.

    Trevor.

  2. > Denial of the global warming effects of increased carbon in the atmosphere amounts to a religious position.

    Are you guys seriously suggesting that we should keep $1000 billion-worth of coal in the ground just because it might increase carbon in the air and cause the planet to warm up? This is of course completely unproven and based entirely on dodgy computer models which could just as easily be programmed to show cooling, or that white is black.

    If we don’t supply the coal, the coal / energy is going to come from some other country and they will get the money. This is economic suicide.

    Clearly the environmentalist priesthood is not qualified to make any decisions on NZ’s natural resources. No wonder NZ is stuffed, and all I can say is I hope their aren’t too many environmentalists in the new govt.

  3. SPC,

    Companies don’t pay any tax at all. Only people pay tax.

    The money the company hands over to the government is money that must instead have been paid out to workers and shareholders.

    So a low corporate tax rate does not leave “the lowest paid workforce in the OECD to fund government”, because they are paying for it anyway one way or another. All a high corporate tax rate would mean is still lower pre-tax wages.

    You can debate what proportion of the corporate tax is shouldered by workers and shareholders respectively. I seem to recall reading about a study suggesting that maybe 70% of corporate taxes came from workers (in the form of lower wages) and the rest from shareholders (lower dividends.)

  4. “a 15% company tax – the lowest in the OECD leaving the lowest paid workforce in the OECD to fund government”

    SPC, that is very necessary. We need to have a low company tax to get economic growth; just look at Ireland – they slashed their corporate tax rate to 10%, and their economy went from being one of the lowest in the OECD, to one of the highest.

    We also need to start having part privatisations. Do you really want the NZX to disappear because there aren’t enough companies listed? Ten SOEs part listed would be very useful for expanding the depth of the market, and thus increase the likelihood that people will start utilising the stock exchange to obtain capital.

  5. Today the Dom Post (Business Section) has someone contributing an article arguing against government help to insulating houses.

    The argument is

    1. that health benefits from warmer homes are unproven (even if patently obvious)
    2. there is no evidence power consumption would fall – he suggests people would use the same amount of energy they do now – just have warmer homes (see 1) – it’s the ultimate in market fantasy that price alone determines usage levels and not aware consumer choice.
    3. that as there are cheaper and better products coming onto the market all the time – it’s better to do nothing – the same argument would have business still running Windows 95.

    Alongside the drumbeat that this is a new 1984 and the government must/TINA adopt a new neo-right programme

    1. a 15% company tax – the lowest in the OECD leaving the lowest paid workforce in the OECD to fund government
    2. a campaign to part privatise SOE’s
    3. gut local government capacity to invest in public transport by capping spending increases (unnless it sells/privatrises other assets such as water)
    4.
    5.

    as they reveal the real agenda of the right for the Key government – never specified by the “centrist” Key himself – the Trojan Horse behind which they now come creeping out of the woodwork. But his sponsorship of the move to SM indicates he is a not unwilling agend of a con against the public.

  6. “Keeping coal in the ground just for religious reasons is silly.”

    Denial of the global warming effects of increased carbon in the atmosphere amounts to a religious position.

  7. Sorry Frog, I don’t see the warming trend continuing. What I see is the trend line catching up to new higher data which has essentially stagnated since 1998.

    Let us not forget that sometimes, trends need to play catch-up.

  8. >>Personally, right now, I feel like hibernating for the next three years.
    Maybe I’ll just disappear into the mountains for a while!

    Trouble is, with a Clayton’s RMA there may be approved mining of those mountains…. for something that will be propurted to enrich the country by billions of dollars :)

  9. 10 cents per KWhr is a reasonable price for retail electricity. There should be no need for us to pay more than that.

    Keeping coal in the ground just for religious reasons is silly. That coal is worth perhaps $1000 billion at the moment.

    Do we actually want to be poor?

  10. Optimist

    One part of your statement I agree with. Generate more electricity.

    I don’t agree with your price target, as it is too low to encourage efficiency. At that price there would have to be separate programs to FORCE people not to waste it heating unheatable houses with inefficient resistance heaters. Preferable that the price meets the market and the difficulty of getting the stuff. Renewable first. We have enough if we are smart enough to use it… and count the carbon offsets required for fossil use.

    Moreover, I would examine carefully the idea of setting the NZ dollar as being backed by some specific amount of electrical energy delivered to a standard wall outlet for a specified period of time and with a standard way of converting electricity put back into the grid, into dollars.

    There are many implications to this.

    I personally can see a value of pursuing an accelerator driven Thorium cycle reactor for the short term… (next 200 years)…. that’s not the Green party position, and the reactors in question are still experimental, but they are inherently safe enough to be used.

    Coal should stay in the ground unless it is the coking coal used in steel-making, and will if the value of the commons it destroys is correctly costed into its use.

    respectfully
    BJ

  11. pat1. You are most definitely and dangerously wrong. What actually happened with the railways is that they were run into the ground by successive governments, most particularly under Muldoon and Lange. In the first seven years of private ownership Tranzrail improved beyond anyones wildest expectations. Then the corporate raiders/asset strippers moved in. Followed by Toll who were definitely deceived about the rundown that had occurred under the Beard management team. It didn’t help that Toll is a logistics company. It had a vested interest in denying rail access to it’s logistics competitors such as Mainfreight.

    The real risk with the government privatising “assets” is that 30 years of failing to properly maintain and upgrade infrastructure in order to hold down prices in election years means that most of those “assets” are in fact liabilities. The really big question mark is whether private owners will be more willing to make the deferred investments than politicians have been.

    One obvious advantage of higher electricity prices is that it improves the BCR for energy efficiency investments.

  12. Is there any reason to part “privatise”, when the only major investors we have are the Cullen Fund and Kiwi Saver? And they represent the wider public interest outside of government itself.

    The government could/should simply allocate shares in the companies to the various funds based on their respective size (up until the 50% level over some years).

    The funds being unable to sell the shares except to finance Cullen Fund payments to government and Kiwi Saver payments to the retired. When this point is reached – the funds concerned selling the shares to continuing funds (those managing the accounts of those still saving for retirement).

    Given we have a company like Contact setting a value for a power company in the market place – we don’t actually need a privatisation/open
    sharemarket to operate to set a value for the funds share of the ownership. After all, the government owned companies operate and have a value without being “traded” at the moment.

    There is simply no need to offer opportunities to a certain few to make a tax free capital gain or hand over ownership to foreigners – when its best that our public assets provide a sustainable base to our economy and social security for New Zealanders.

  13. Is this a good time to say:

    MINE THAT COAL!!!

    We have 2000 yeas of it in the ground, and we need to dig it up quick-smart before no one wants it anymore.

    Re electricity, I don’t know what the answer is, but we need some. Any means is fine so long as the retail price averages 10 cents a KWhr. 20 cents is far far too high.

    Coal might be ok, or hydro. I really don’t care. Just generate the stuff, ok?

    How about making DOC lease its land to private mining operators? Did you know that Stockton is only 700ha, but produces about $500m a year in revenue? DOC owns a third of our land!

    I think you are right about the market. NZ is arguably too small for a proper competitive energy market, although surely we could do better. The alternative is therefore government ownership (god help us), regulation of private companies (ug) or the SOE model (hmmm). None is very appealing.

    What is the answer? Cut regulation and make it easier to build a new power station in a NIMBY’s back yard. Set a target retail price for power of half the current one. Allow as much private competition as possible so the state sectors gets to see how to run things properly. Attract massive amounts of capital, from the cullen fund or overseas if necessary, to make it happen.

    Above all, coal.

  14. Perhaps if the left had of managed state owned assets a bit better we would not be having this discourse right now.
    Its funny how Solid energy all of a sudden became so much more efficient when the privately owned Pike River Coal opened a few km up the road.
    If the govt is going to own assetts we need to figure out a way to run them efficiently, and the only way I can see is by partial privatisation.

  15. Frog

    Maybe then the government should allow the Cullen Fund and or Kiwi Saver Fund to own up to half the power companies.

    Then the government via “our” funds involvement would be more focused on the seeing the companies invest for the future and maintain/increase value – rather than extract dividends for the short term.

    And it would focus all our minds on how the companies were run – the problem would still be, how to on secure public control and viability beyond then – I suppose on-going Kiwi Saver for the next generation would be the way …

  16. Oh dear! Here we go again!

    I’m getting too old, and with too much prior experience, for this!

    Are there any good papers written about the true costs of the “on again / off again” behaviour of successive Kiwi Governments ?

    ……………………………………………

    phil: “an opposition party? ”
    Yes ! … but in a sense, aren’t we always?

    Unlike other Parties, when we can’t agree our MPs do (at least) abstain.

    To be effective, the “Mouse that Roars” (in a very “Green” way of course!) must choose its territory strategically to ensure that it retains the ability to “work cooperatively” and to “reach” as many disparate groups (and individual voters) as possible.

    Personally, right now, I feel like hibernating for the next three years.
    Maybe I’ll just disappear into the mountains for a while!
    eredwen = mountain woman (in Elvish)

  17. dbuckley

    Fair point, but the pressure on Key to do this will come from within his own party.

    The same paper, post election, prints an article claiming climate change is caused by sun spots and how this cycle poses a “cooling threat” that can only be alleviated by carbon pollution greenhouse gases”. Right out of the pro ACT party editorial handbook.

    The its beyond our control line – so there is no need for any “responsibility” to act to sustain the evironment. The party of “personal” responsibility not letting anything get in the way of personal profit now.

    Similarly in trying to cut back the cost of provision for others and public service delivery – by limiting central and local government funding/spending.

    The creed of no responsibility to others, only to oneself and one’s own well being. The beggar thy neighbour to enrich another creed, the despoil the environment, take the profit and run ethos (shared by bankers who retired very well off thank you very much).

    Greed blinds them to the reality that carbon resources are finite and being depleted.

  18. dbuckley – fair comment. However, the rags are full of “privatisation makes sense” stories now that we have a change of government. As soon as this repetition becomes “common wisdom”, National will act.

    SPC – In fairness, Contact has been acting fairly responsibly and not running it’s assets down, and investing for the long haul, it’s directors fees debacle notwithstanding. On the contrary, the state owned Genesis has squeezed gas guarantees out of the govt in order to build E3P, and will now build the uneconomic Rodney station without such a guarantee in order to double the price of gas every one of its customers has to pay. It is the SOE that is being run into the ground, not the private company!!

  19. The great unspoken question of the campaign was this – John would National sell off parts of state companies or some of the assets of state companies? The supplementary question being, if it is not Naional policy to do so – “would” such policy concessions be obtained by ACT or United when forming support arrangements (making official National policy on the matter meaningless)?

  20. Although I share the trepidation, to be fair, this is just the ramblings of a scurrilous rag, rather than actual government policy. Optimistically, its just possible Key will have none of it.

  21. frog, is it not the same because we are so much more dependant on power (and will become even more so as oil runs out again) that when we have to buy it back we will pay 5 times the price instead of just double?

  22. The right wing is after profit for those of them with access to capital wealth

    1. the purchase of power company shares – bought for a dollar of the government by “mum and dad” investors (about 10-20% of the population who already own their own home – many of whom are empty nesters) and then sold for $2 to either the Cullen Fund/Kiwi Saver funds or foreigners. An untaxed capital gain.

    We already know through Contact how these privatised companies will operate – like bankers on Wall Street paying out huge salaries and remuneration packages to management while running the companies into the ground – paying our dividends offshore – while forcing the state to subsidise investment in new power genertion (as per Toll pre Kiwi Rail).

    2. cutting back local government – restricting rate increases forcing local government privatise service provision (water supply for profit etc)

    3. private funding partnerships – new prisons, roads etc (guaranteed profits – including if possble untaxed capital gains).

  23. ‘No privatisations”. What a nakedly transparent lie that always was, and how their puppets in the media failed to ask any serious questions on the matter.

    Does this mean Labour will give us “KiwiPower” in 2012 or 2015? At least we’ll have a few years to think up better names for it!

  24. pat1 – While it’s not entirely the same thing as the railroad example of failed privatisation, I suspect that this is exactly what will happen to the mega energy SOE in the long run.

  25. “…don’t lose heart… they may want to cut it out… and they want to avoid a lengthy search” – Heinlein

    Greed besotted fools will do what they have the power to do. We failed to maintain the power to prevent it and we reap the consequences.

    respectfully
    BJ

  26. are these the first murmerings of the greens becoming a real opposition party..?

    “it’s an ill wind..etc..”

    ..eh..?

    ..phil(whoar.co.nz)

  27. I could be wrong but didn’t this happen with the rail system where it was sold off to foreign investors in 1993 (for $328m), who subsequently ran it into the ground, then sold it back to the govt in 2008 for about twice the price?

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