Free market electricity ripoff

This week the Commerce Commission released a damming report on the so called 'electricity market' in New Zealand. Electricity companies have overcharged New Zealanders over $4.3 billion dollars in six years.

While the report found no breach of the Commerce Act - its conclusions were far more devastating for those who would argue for further privatisation and the maintenance of a 'lightly regulated' framework. The Commerce Commission concluded the electricity companies used their market power to maximise profits in a legitimate way within the current market structure and rules. These being rules created by free market minded politicians.

The Otago Daily Times editorial puts the blame right where it ought to be - the National Government of the late 1990s and the Labour-led Government between 1999 and 2008. While Labour introduced the Electricity Commission, and appointed an old Rogernome to run it, their actions effectively embedded the infamous reforms of Max Bradford. I don't think I will be revealing any state secrets when I say the Alliance at the time was very uncomfortable in being asked to support the Electricity Amendment Act in 2001 - an Alliance Parliamentary adviser working on these issues told me it was so bad we should not have supported it at all. But Labour had light-handed regulation as a religion - and lack of regulation is one of the key problems identified by the Commission this week.

If Labour really had the will to fix things up they could have bought back Contact in 2004 when its parent company Edison Mission Energy was in need of cash. With the main four in Government control, Labour could have made the significant changes to the sector that are required, without the interference of the rent seeking privateers.

Our regulatory regime is so pathetic it doesn't even mandate the provision and collection of the data required for the calculation of competitive benchmark prices. Most other countries do. Professor Wolak, who crunched some of the numbers for the Commission said it took him more time to compile and clean the datasets on the New Zealand electricity supply industry than it did for all his previous projects put together - this includes an analysis of market outcome data from California, England, Wales, Columbia, Australia and Spain (p. 25).

It sounds very much like National and Labour have effectively allowed the electricity industry to design the system to suit themselves. Electricity companies do not even have to participate in the collation of meaningful data. Gee, in whose interests might that be?

A couple of comments from the Commission are worth highlighting. "The experience of countries that have liberalised wholesale electricity markets has shown that the assumption that markets will naturally produce a competitive result is not always justified....[T]he economics of electricity has specific attributes, which makes competition in this sector significantly different from that for most other products." These include very high market entry costs and the fact that demand is largely unaffected by changes in the wholesale price, as consumers do not immediately face price increases as scarcity increases. This companies gain substantial market power.

And before some clown points to the fact three of the major electricity companies are State Owned Enterprises (SOEs) and attempts to argue that government ownership is somehow the problem - I would remind them that the primary goal of SOEs is to make money*. So on this basis I would argue New Zealand already has an effectively privatised electricity system - it just so happens one of the robber barons is the government.

Sadly no SOE has ever gone Kiwibank and aimed to lower costs for consumers. Another model would see power companies run like non-profit trusts with the aim to produce power in the most socially responsible and environmentally sustainable way.

Dunedin blogger Chris Ford calls on the Government to order the electricity companies to pay back their ill gotten gains to consumers. While there is some justice in this proposal, this would effectively require the Government to pay out dividend money that now lives in the Crown accounts. I would sooner use a $4.3 billion pot to fix up the industry once and for all, and if nationalisation is the most effective means of achieving effective policy change, so be it.

The report by the Commerce Commission this week is a damming incitement on the current electricity system. Yet it also dams the agenda of those who want to further privatise the SOEs and maintain a lightly regulated market.

It is simply opportune nonsense for Energy Minister Gerry Brownlee to blame it all on the Electricity Commission - the problems go a lot deeper than that. The Commerce Commission have effectively demonstrated the difficulties in creating a functioning electricity market in a small place like New Zealand. Perhaps it would be better not to try.
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Cartoon credit: The cartoons in the above post are the work of a couple of creative Dunedin Alliance members (E. & H.). Thanks for giving me the ok to post them here.

* It could be argued the SOEs are failing to live up to a requirement in the State Owned Enterprises Act to exhibit a sense of social responsibility - unfortunately many other SOEs seem to ignore this too.

Corporates should stop defaming cute fluffy animals

Watching Contact's latest television advertising campaign the other day, I realised that Telecom and Contact Energy are two peas in a pod. Both are former publicly owned assets which were privatised with disastrous results. Both make huge profits from New Zealand consumers, as a large portion of which is exported into the pockets of overseas investors.

But Mother Earth is pissed at Telecom and Contact for another heinous crime - the exploitation of cute fluffy animals. Back in the 1990s Telecom asked an advertising agency to come up with a campaign to improve its public image, an image damaged by abuse of its monopolistic market position and sending thousands of its workers onto the dole queue. Not that Telecom had any intention of changing their spots and improving their corporate behavior. Instead, they introduced a sideshow, SPOT the dog.

Following negative publicity about power blackouts and price rises, Contact have adopted a similar approach with their 'birds' campaign. The use of birds also has an implied environmental message, despite the fact Contact is using power consumers money to run a propaganda campaign in favour of coal power, which may be the most profit friendly form of energy for Contact, but it certainly is not the most environmentally friendly option for New Zealand. Instead of improving their behavior and becoming socially responsible corporate citizens, Telecom and Contact opt for emotional manipulation of the populace.

It is a shame irresponsible corporates can use the good name of cute fluffy animals with no repercussions. Often the poor animals will work for no more than a bone. I am sure SPOT's brothers and sisters, as well as their human companions, had to face taunts of 'telecom dog' and an unwelcome association with New Zealand's most unloved multinational corporate. Now thanks to Contact, cartoon birds are going to be tarred forever.

Dangers in the addition of an 'Investment Chapter' to CER

On Thursday this week the Minister of Finance Michael Cullen and his Australian counterpart announced “solid progress” towards the creation of the ‘Single Economic Market’ between Australia and New Zealand. “ Ministers also decided to investigate the possibility of adding an investment component to the Closer Economic Relations (CER) agreement.”

Thus the idea of an ‘investment agreement’ was floated again, with no analysis or explanation of what an ‘investment’ chapter of CER would entail. Perhaps Cullen gave nothing away because giving such an explanation would reveal an ‘investment chapter’ as a direct threat to democracy.

The benchmark for ‘investment agreements’ is the infamous ‘Chapter 11’ of the North American Free Trade Agreement (NAFTA). These provisions give multinational corporations the right to sue governments for compensation or reversal of laws/regulations that threaten their profits.

For example, the Canadian Government placed a ban on a toxic petrol additive, MMT on the grounds it caused nervous system damage and interfered with car emission control systems. In response, the producers of MMT, the Ethyl Corporation, used the provisions of the NAFTA to sue for $250 million, claiming lost Canadian profits and damages. Faced with lengthy court action, the Canadian Government was forced to revoke the ban in 1998, pay the company US$13 million damages and issue an apology. There are many other similar examples. As Bill Rosenberg (2001) has noted, even the threat of such proceedings acts as a break on a government acting in the interests of its citizens. Mary Lou Malig (July 2004) reports;

Canada had good reason to want to avoid a large damage reward. Since the implementation of NAFTA, the total amount of damages claimed by foreign investors has been a total of $US13 billion - $US1.8 billion from US taxpayers, $US249 million from Mexican taxpayers and $US11 billion from Canadian taxpayers"

These provisions are a direct threat to democracy, as they give foreign investors the right to challenge the mandate of governments to implement policies in the public interest; even in the case such policies formed part of a successful electoral platform.

A likely model for the CER investment agreement is the ‘Investment Promotion and Protection Agreement’ (HKIPPA) New Zealand signed with Hong Kong in 1995 (signed by National’s former Don, Don McKinnon that is). This agreement contains equivalent ‘expropriation’ clauses to those found in NAFTA, which aim to also cover Government actions that have an ‘effect equivalent’ to direct expropriation. In NAFTA this has been interpreted to include loss of an investment’s value through loss of profitability.

It also must be noted that the Government's new Overseas Investment Bill, currently before the house, allows the Government to further liberalise investment law by regulation (such as the threshold for business investments and the definitions of associated land). In the context of negotiations over the extension of CER or any other 'free trade' agreement this would allow the government to make further concessions largely free of parliamentary scrutiny (the RR committee is not sufficient!).

While at present it may seem unlikely that an Australian investor would make such a claim, it does beg the question why overseas investors are being given greater rights than local citizens or businesses. Consider the clearly signaled, high profile policy of the Labour party in 1999 to renationalise ACC. ‘Investment protection’ agreements could have affected or prevented the implementation of this policy following the election of the Labour/Alliance Government, especially if private insurance companies had a legal presence in Hong Kong. In this case, it was probably lucky the private ACC market had not been going for very long.

To give a contemporary example, any attempt to further regulate the privatised electricity market created by Max Bradford and embedded by Pete Hodgson could be met by a challenge by the new Australian owners of Contact Energy, who could claim that Government actions negatively affected the profitability of their ‘investment’.

Given the NAFTA experience of Canada and Mexico, perhaps such challenges are not so unlikely after all. Any proposals to include NAFTA or HKIPPA like clauses in CER, or any other ‘free trade’ agreement, should be steadfastly exposed and opposed. Such provisions are a direct threat to democracy as they could prevent our Government from implementing policies given a democratic mandate by the New Zealand people. And that, at the end of the day, is what democracy is all about.

More on Contact: Pocket the cash, put up power prices - Sue Newberry's analysis

Last month I wrote about the prospect of investors taking a 'capital return' out of Contact Energy and the likelihood this will lead to higher power prices. On Friday an article by Sue Newberry in the Christchurch Press reached the same conclusion (unfortunately I was unable to find an online version). Sue is a senior lecturer in financial accounting at Canterbury University.

Newberry also reports Contact plan to push through changes to corporate governance at a meeting scheduled for February 15, to remove its self-imposed restrictions on dividend payouts and capital returns to shareholders. Contact could then make a massive payout to shareholders, perhaps as large as $1.15 billion, which will be financed by the company taking on more debt.

Newberry says "Electricity Consumers should think of this massive payout as coming directly out of their own pockets. Part of this payout will have come from money already accumulated within Contact as a result of the high electricity prices domestic consumers already pay; the rest will come from increased electricity prices yet to be imposed."

To Newberry, this highlights a key problem with the current electricity pricing regime. Electricity companies are allowed to earn profits which represent an acceptable percentage return on assets. When a company revalues its assets upwards, just as Contact made a massive upwards revaluation last year, the dollar amount required to earn an acceptable percentage return rises immediately - electricity prices must rise as a result. The asset revaluation also leads to an increased depreciation costs. Electricity prices have to rise again to cover that as well.

On the back of speculation about a capital return to shareholders, Contact's share price jumped over the $7 mark to close yesterday at $7.02 (today's Press, p. C6). Good for investors, but not necessarily good for consumers. The Press also reports big industry is complaining about electricity prices as high as $1.34 a kilowatt hour in the North Island. So a privatised electricity system is kicking the private sector too. That said, the complaints of Comalco New Zealand need to be taken with a grain of salt, especially their disappointment in having to reduce power use by 5% to avoid the daily spot market. The overseas owned company running the Bluff aluminum smelter gains most of its power at far below market rates, thanks to a deal made with the Government in the 1960s to convince Comalco to set up the smelter. The details of this agreement remain secret to this day, but Muldoon did confirm in Parliament in 1968 that this deal included significant tax breaks as well.

If there is a "power crisis" this winter, higher prices will be to the benefit of Contact's Australian owners and other investors, who will be comfortable with their capital return and dividends from the company. But they have no chance of being cold as a result (but I guess NZ shareholders could complain about power prices at a shareholders meeting!)

If there is a "power crisis" this winter, while we are all being told to turn off all unnecessary power, perhaps we should consider closing down the Bluff smelter - if we are serious about electricity savings and guaranteeing supply to essential services. Closing one smelter would release around 15% of NZ total generating capacity.

Fangs of corporate Draculas could push up power prices

'Market commentators' suggest Contact Energy should consider a substantial 'capital return' to shareholders. This should be seen for what it is : An attempt by overseas based shareholders to drain Contact of cash, a move bound to push up power prices in New Zealand.

To make matters worse, this capital return is to be funded by Contact taking on more debt.

"This may suit [Contact's] new majority shareholder Origin Energy of Australia which could clear a third of the debt ($1.65b) taken on to purchase Contact within a year and strengthen its own debt to equity ratios." (Press article, variant on Stuff)

Origin, now in control of the former SOE, would get Contact's own shareholders to pay for a substantial portion of the purchase price! And as this would funded by debt, Contact's New Zealand customers will pay through higher power prices. But to be fair to Origin, at present the public calls for a capital return are only coming from other institutional investors such as First NZ Capital. One hopes as the majority shareholder they reject the proposal as being against the long term interests of the company. Unless of course, they too are after a quick buck.

"First NZ Capital estimates Contact could take on up to $1.15 billion of debt - the "extreme scenario" - to pay out shareholders. Origin's share of that would be $589 million. That would double Contact net debt to total assets to 60 per cent from 27 per cent this year. Without a cash return, net debt to total assets would fall to 23 per cent by 2006, the investment bank says. First NZ Capital says $589 million would be almost enough for Origin to repay most of the "convertible undated preference shares" it issued to Deutsche Bank to partly fund the $1.65 billion purchase of 51.2 per cent of Contact from Edison Mission Energy last year. Deutsche holds $662 million worth of the instruments. Taking on more debt would reduce Contact's overall capital costs and be beneficial for all shareholders, First NZ Capital says."

But this would not be beneficial to consumers, and they wouldn't get a payout. The stuff article also reports:

"Contact is flush with cash but might not have big capital-hungry projects for another three to five years. It might need another $500 million gas-fired power station, provided it secures a long-term gas supply. The company will also require funding facilities for the importation of liquefied natural gas from about 2010."

Here lies another problem. Electricity is a capital and infrastructure heavy industry. There are not enough incentives under a privatised free market electricity system to build additional capacity before it is required, as this will lower prices. The electricity crises over the past few years were made worse by the lack such additional capacity. Nor are there enough incentives to conserve energy, as more 'sales' simply means more profits. Power users and shareholders have fundamentally different interests, and the latest plan to bloodsuck Contact of cash only demonstrates this once again.

Once shareholders have taken the cash, what will happen in a few years time when Contact suddenly needs more capacity? Thanks right, they will ask shareholders and the New Zealand public to pay for it again.

One option I have thought of is removing the state owned electricity enterprises from the State Owned Enterprises Act, as this would remove the requirement for Meridian and co to act like companies. Instead a non-profit model could apply whereby all revenues gained from electricity bills could be put back into capital redevelopment, encouraging conservation, carbon credits and lower prices. People might even be happier when they get their power bill knowing where the money is going. Faced with real competition Origin may be keen to sell out, allowing the government to merge its generators and retailers together, thereby creating more savings.

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PS: Faced with a corporate vampire, say the word 'nationalisation' three times. They will make a quick retreat as good as garlic!

PPS: Lost a blog post last night due to computer apparently hanging. Just realised how I could have saved it - drat.