Russel Norman
Privatising public energy companies in Wonderland

Tony Ryall, Minister of State Owned Enterprises, turned up to the Finance and Expenditure Committee today to justify their plans to partially privatise the state owned energy companies.

With a little bit of creative licence, the exchange went something like this:

Tony: We need to partially privatise them so that Government can raise capital to spend in other areas and so that the energy companies can get access to more capital.

Russel: But the energy companies could just issue bonds to raise capital, you don’t have to privatise them.

Tony: Yes but selling shares is better than issuing bonds.

Russel: But you just forced Genesis Energy to buy Tekapo A&B power stations from Meridian with $821 million in borrowed money, and then Meridian used that money to pay Government a special dividend of $521 million. So effectively you made the power companies go further into debt making it harder for them to get the capital.

Tony: They might have done that but we didn’t make them.

Russel: But if you do sell them, none of the proceeds of the sale goes to the companies, it goes to the Government, so it doesn’t help them get access to more capital at all.

Tony: That’s right. But they can then issue more shares to raise capital.

Russel: But if they issue more shares then the Govt’s share will be diluted and will be less than 51%, and hence you will lose control of them.

Tony: [Pause] Um, well…. if that happens then the Government will buy some of the shares to ensure that we keep at least 51% ownership.

Russel: So to protect your 51% ownership you would need to buy 51% of new shares offered, so half the new capital raised will actually be provided by the Government?

Tony: Precisely.

Russel: What was the point of all this exercise again?

Tony: Life in Wonderland has its own point.

14 thoughts on “Privatising public energy companies in Wonderland

  1. Russel – if you are so against the public / private partnerships of the power companies, why did you suggest a public / private partnership of the power companies in your podcast (where they take on high risk private ventures with public money).

    Because that puts taxpayer money at considerably more risk than simply offering shares.

    And if you really think this is so bad, why haven’t you complained loudly about the Air NZ ownership model – when you’ve had ten years to do this.

    Like or Dislike: Thumb up 1 Thumb down 1 (0)

  2. Theres something of a difference between the proposal to (partially) privatise power companies and the Air New Zealand situation.

    One is a single player in a competitive marketplace with many players, and one does not have to deal with Air NZ ever if one chooses not to.

    On the other hand, you pretty much have to have electricity, and you have to get your electricity from somewhere, one has no real choice in the marketplace.

    Like or Dislike: Thumb up 2 Thumb down 0 (+2)

  3. photonz – share issues by SOE’s are an alternative to borrowing the money. The central theme of our economic policy, as the the country has foreign debt as a large proportion fo GDP, is to grow without increasing further debt.

    And to grow while retaining local ownership of the SOE’s so that we don’t exacerbate our BOP deficit with a revenue stream offshore to foreign investors.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  4. I look forward to the day when creating more grid isn’t the issue as we become more energy independent through improved solar technologies.

    Like or Dislike: Thumb up 2 Thumb down 0 (+2)

  5. Good work Russ, this is national’s weakest policy plank with ‘the average voter’ I think reasoned economic arguments to not sell them need to be driven home again and again.
    Paint the privatisers as the whacky, out-there, lot and yourselves as the voice of reason.

    Like or Dislike: Thumb up 5 Thumb down 0 (+5)

  6. dbuckley says “On the other hand, you pretty much have to have electricity, and you have to get your electricity from somewhere, one has no real choice in the marketplace.”

    What about Contact, Trustpower, etc? There’s a larger choice in electricity companies than airlines.

    SPC says “The central theme of our economic policy, as the the country has foreign debt as a large proportion fo GDP, is to grow without increasing further debt.”

    Selling part of the SOEs will retire debt and save having to borrow more for other infrastructure.

    So if we don’t sell them, we will be FURTHER in debt than if we do.

    Can I clarify – is your idea for the govt to retain ownership in SOEs at current amounts, but to expand the SOEs through private investment? (i.e. issue shares for the expanded portion of the companies)

    Like or Dislike: Thumb up 0 Thumb down 0 (0)

  7. Seems to me that National doesn’t have a good reason why they want to do this – either that or they are really bad at articulating it.

    If they want to partially sell so they can purchase/invest in other infrastructure projects, then why aren’t they saying exactly what they’re going to invest in?

    If it’s just to pay off debt, then why are they currently taking on more debt than they need to, while the borrowing is cheap? Why are they selling off assets that generate income?

    It seems to me that the reason is ideological. All parties suffer from this unfortunately, but it is at least an attack vector that the Greens and others can take advantage of by showing they’re the voice of reason. Repeat it enough and folk will listen.

    It may not change the outcome of another JK government, but it will lead to a stronger green contingent in opposition which seems to be the only way a stronger opposition can be had!

    Like or Dislike: Thumb up 0 Thumb down 0 (0)

  8. No PhotoNZ, there is no choice in energy companies. There may appear to be, but there isn’t.

    I’ll give you an example. An incorporated society I am a member of is lucky enough to have its own clubhouse. We use electricity. We pay about a buck fifty a day standing charge, and use about 800KWh per year. Our electricity bills are around the 800 dollar a year mark, almost all of which is the standing charges.

    We’d like a plan that pays lower standing charges, and finally Tiny Mighty Power said, yes we have a low user plan that you can use (no other company could do anything similar), and it should cut our bills in half. Only when they tried to set this up for us, it got blocked, because they are not allowed to offer a low user plan to non-domestic customers.

    Competition and choice – pah.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  9. dbuckley – a very unusual and unique situation is not a good example of why there is no choice.

    Similarly if you want to fly out of Invercargill, Wanaka etc, there is not the choice of airlines.

    We have a choice of six power companies with a $400 difference between the cheapest and dearest for the average household.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  10. “We have a choice of six power companies with a $400 difference between the cheapest and dearest for the average household.”

    I’d believe that.

    But what you actually have is the same power with six different rates being charged depending on who you choose to bill you.

    Have a look at This paper from Trustpower (PDF, 113K), starting from 2.1(b) as to why one company chooses to charge a lot more than another.

    If I was being honest, it probably doesn’t matter what happens to electricity companies now, since all that is going to happen is we are going to get shafted more and more. The damage has been done.

    The unwillingness of successive governments over decades to invest OUR money in the infrastructure WE bought allowing OUR ASSETS to go to rack and ruin was problem number one, and then the electricity market reforms destroyed what was left of one of the world’s best designed and thought out power systems.

    Truly sad.

    Like or Dislike: Thumb up 4 Thumb down 0 (+4)

  11. dbuckley says “But what you actually have is the same power with six different rates being charged depending on who you choose to bill you.”

    So why have people for years paid hundreds of dollars per year more than they need to, then complain about power prices?

    There’s not much incentive for power companies to price competitively if New Zealanders are so unconcerned about electricity prices that they happily pay hundreds of dollars more than they need to.

    Like or Dislike: Thumb up 0 Thumb down 0 (0)

  12. Good onya Russel.. you need to keep this “we intend to privatize the public sector & Govt. agencies” agenda of this Govt. at the forefront of the political debate..
    then hopefully their days are numbered (GONE after 26/11)!!
    Kia-ora

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  13. “So why have people for years paid hundreds of dollars per year more than they need to, then complain about power prices?”

    Thats two different issues with two different answers.

    And the complaining groups may be separate though in part overlapping.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  14. Photonz –
    all NZ electricity generation is still sold on spot prices through The Marketplace, from whom each electricity supplier has to buy to on-sell to domestic consumers.
    The various company names you have quoted devolved from the original district power boards when electricity was carved up in the 80′s.

    The companies have done better or worse depending on which physical resources for electricity generation were in their geographical district – so Meridian have a bunch of hydro lakes, Contact have Huntly, etc.
    Also dependent on how much external investment they took on (overseas-based shareholders who require dividends).
    Those power companies who re-invested in renewables have reaped the rewards, and can offer their domestic clients better rates.

    The regional framework handed down from the old district power boards is also the reason why db’s experience occurred – there is some protection of local clientele built into the SOE’s operating rules, can’t poach outside certain parameters.

    So yes, as Russell alluded, it is all one market, heavily influenced by the thinking of the Ministry of Energy/Minister of Energy during any one three-year political cycle. And that Minister has got the power to sell us all down the river, if he can baffle the select committee enough.

    Do we want the Government selling off NZ electricity generation to overseas interests like say USA power corporations? This would be a serious breach of sovereignty, putting control of vital infrastructure in the hands of another country’s business hierarchies.
    Or do we want it to be sold to a consortium of NZ merchant bankers, say Michael Fay and friends, so that another profit sucking debacle can finance their lifestyles-in-exile in Switzerland?

    Frankly, I wouldn’t want to see either option!

    Like or Dislike: Thumb up 3 Thumb down 0 (+3)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>