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.

Big Business: Helen's real coalition partner

Fran O'Sullivan in the NZ Herald (Hat tip Cathy) alleges that Helen Clark and senior ministers sought the advice of senior business CEOs on the makeup of her new cabinet and a more pro-business direction for her third term in office.

"While television journalists traipsed about the Beehive after self-important minor party leaders as coalition negotiations deepened, Clark was carrying out parallel "coalition" negotiations with an arguably more important constituency: NZ business."

Clark is understood to have invited:

"Ann Sherry (Westpac CEO and chairwoman of the Government's Innovation Advisory Group); Theresa Gattung (Telecom CEO and GIAB member); Mark Weldon (NZX CEO), Fonterra chiefs, Craig Norgate (Rural Portfolio Investments managing director and GIAB member); NZ Institute CEO David Skilling, Rob Fenwick (Council for Business Sustainability); Michael Barnett (CEO Auckland Regional Chamber of Commerce); and a group of energy sector players convened by Wellington lawyer Mai Chen." ... "The CEOs were whisked to her ninth-floor office for individual consultations with Clark, her chief of staff, Heather Simpson, and Finance Minister Michael Cullen. Other ministers from Clark's inner circle such as Pete Hodgson and Trevor Mallard were brought in as required."

I wonder if there were any similar meetings with trade union representatives, poverty campaigners, environmentalists or community groups? Surely it would have been more appropriate to hold such a meeting prior to the election, or subsequent to the formation of the government? Or are we leading to a situation where dosh leads our democracy?

Now I have no problem with business leaders meeting with the Government to discuss policy issues, so long as their level of access to Ministers is no different to that offered to any other individual or other group in New Zealand. But I believe it is highly inappropriate for big business to have a say in the formation of a government. This should be the exclusive domain of voters and those they elected to be their representatives, with 'apolitical' public servants providing constitutional advice where necessary. Even inviting business leaders into such a meeting gives them the impression they have more power than they are entitled to.

What is Helen scared of?

Does this help explain why the Green party attempted to improve relations with the business community with a well intentioned, but ultimately ill fated meeting? Was it your idea Helen?

Now what would have happened if I, or any other voter rang Clark's office and requested a meeting to discuss the formation of a the new government. "Hi Helen, could I give you some advice on who you should put in your cabinet?" I would expect to be told to noddy off until the politicians had completed their negotiations.

Fran also talks to business leaders "speaking on background" who take delight in Clark appointing more pragmatic (read right-wing) ministers into economic portfolios and report they expect Clark to be "'much more pragmatic' about economic reality". Yet they give no grounding to their metaphysical speculations, leading me only to recall the words of David Hume about 'sophistry and illusion'.

It seems the third term of this Labour-led government will be driven by a greater sense of cash consciousness.

PS: Now I admit I do take anything written by Fran O'Sullivan with a touch of salt, given her history of strong "advocacy" journalism on issues such as free trade with the US, joining NAFTA and taking trips abroad "courtesy" of the free trade lobby. It may not directly influence her writing, but its not a good look. I get the impression Fran is no fan of Helen's either.

Could Watergate be uncovered today - some reflections on the media

Today I was interested to hear that Mark Felt, former deputy director of the FBI has confirmed he was 'Deep Throat', the inside source who leaked the secrets of the Watergate scandal and helped bring down President Nixon. Only last week I was watching 'All the Presidents Men' - the 1975 film which tells the story of how two junior Washington Post journalists uncovered Watergate. 'All the Presidents Men' is a top notch drama, and best of all, its all true.

Could journalists uncover a scandal like Watergate today? Would we see a major commercial newspaper dedicating two staff reporters to a story for more than two years? Somehow I doubt it, especially if such an investigation was seen to challenge the traditional powers that be. Advice to 'follow the money' now means something quite different in journalism - just ask Rupert Murdoch.

Would a genuine whistleblower be treated any better today, if they made themselves publicly known at the time? While it does depend on the attitude of individual countries to 'official secrets' and the provision of adequate legislation to protect genuine whistleblowers - the attitude they face is usually pretty hostile. Consider the case of GCHQ worker Katherine Gunn, who revealed that UK intelligence services were bugging the United Nations.

The modern media appear to place a higher value on an instant stream of new facts instead of hard slog investigative reporting and analysis. Similarly, scientists are encouraged to immediately find 'commercial applications' for their work, with lower 'value' attached to 'blue skies research'.

Sadly there appear to be few opportunities to be involved in genuine investigative reporting without doing years of inconsequential human interest stories. This, in a nutshell, is the reason I have not applied for journalism school.

Occasionally there are some notable and worthy exceptions, such as the recent series in the Press uncovering the dodgy Transpower cross border lease, but this investigation was not led by journalists within the newspaper. The key research for this story is due to work carried out by Sue Newberry as part of her role as a senior lecturer in accountancy at Canterbury University.

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.

Contact: No capital return for now, but the threat still remains

I was pleased to see that Contact Energy has informed the NZX sharemarket it has no plans to return capital to shareholders, but has instead allocated $130m for capital expenditure. See my previous posts on this issue, here and here.

But the threat of a capital return still remains. On the same day Contact's large shareholders, including its board, used their voting power to push through changes to corporate goverance at the annual meeting of the company. This will remove self-imposed restrictions on dividend payouts and capital returns to shareholders that previously formed part of the constitution. So while its good the corporate highwaymen demanding a capital return will not be getting anything soon, the changes to corporate goverance of Contact make it more likely this will happen in the future.

At the annual meeting Contact Energy's directors also came under fire for defending the donations of $90,000 the company makes to political parties on an annual basis, supposedly based on the number of seats they hold in the house. According to the NZ Herald, a majority of the about 150 shareholders at the meeting supported calls for future donations to be approved by investors. However, as the vote was based upon number of shares, it was lost, with only 11.62% of voting shares recorded in favour (88.38% against). This shows the extent by which the wishes of large shareholders dominate those of small shareholders within the company. As the right often idolise the business community, its no small wonder its usually the left who defend and extend democracy.

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.