Joe Hendren

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Saturday, May 23, 2009

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.
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.

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At 3:05 pm, Blogger Paul said...

Former Labour Ministers should be ashamed. The worst-affected victims of this price-fixing, as always, are those least able to pay.

At 6:01 pm, Anonymous paulose said...



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