Bernard Hickey says the Government and power companies have 'crossed the red line' and this has triggered the regulatory backlash promised by Labour and the Greens

Bernard Hickey says the Government and power companies have 'crossed the red line' and this has triggered the regulatory backlash promised by Labour and the Greens

By Bernard Hickey

What was the electricity industry thinking?

Did it think it could get away with generating super profits from a network monopoly forever without a political reaction?

In the world of corporate and governmental relations there's a vague concept that practitioners refer to as a 'license to operate'.

It means that large companies or departments know there's only so far you can push the public at large and politicians before they react by effectively removing that 'license to operate' and regulating profits lower.

Large companies do their best to 'push' their profits up to the limits of that public mood without generating a regulatory or political action that will damage their interests.

They try to extend out that red line through 'good works' in the community such as sponsorships and donations.

They also do their best to obscure or fudge the extent of the super profits by arguing they are justified for strategic or structural reasons such as security of supply or economic and financial stability.

But sometimes the sheer size of the super profits becomes so egregious and obvious as to invite a backlash.

The electricity industry's super profits have been building towards that red line for much of the last decade.

The current National government realised the power consuming public was nearing the end of its tether in 2008 when residential power prices had run up much, much faster than inflation generally. So it acted to force more competition at the retail end of the line with its 2009 sector review and the very successful 'Whatsmynumber' campaign that followed.

It helped increase the switching rate over the last couple of years towards 20%.

Annual residential power price inflation halved from around 8% in the decade from 1998 to 2008 to around 4% since then.

But it is still running at quadruple the general inflation rate and it's clear for all to see that power industry 'competition' hasn't worked to reduce or even restrain power prices for voters, as opposed to businesses.

The final straw for many voters was the government's decision to sell 49% of the three remaining state owned power generators and retailers.

Voters and the main political parties could previously console or convince themselves that power company super profits weren't such a problem because they came flooding back into the government coffers in the form of dividends and higher asset valuations.

In effect, it was another form of a tax that was at least collected broadly and then returned in the form of government goods and services.

The only major outliers were the privately-owned Contact and Trustpower, but they were small enough relative to the overall sector as not to matter that much.

The SOE sales programme changed all that.

It proposed handing over those super profits to the richest New Zealanders in the form of shares and dividends.

That was the moment the government and the industry crossed that red line and triggered the regulatory backlash promised this week by Labour and the Greens.

What was the industry thinking? That their customers and voters would not notice?

The shock of investors realising they had crossed the line and would pay the price was evident in the 12% fall in Contact's share price and the 7% fall in Trustpower's share price on Thursday and Friday.

No doubt, the likely price of Mighty River Power shares also took a tumble in the minds of potential investors.

As Labour and the Greens would say privately: 'That'll learn ya!'

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This column first appeared in the Herald on Sunday. It is used here with permission.

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Well said Bernard. But will there be a backlash from big business? Do they accept they have pushed too far from what is acceptable to society? Other industries like construction are nearing the red line too. What will their reaction be? Big donations to National? Strong arm tactics on MSM using the threat of advertising cuts. Is Labour/Greens proposal going to form a new consensus between business and the wider society or the start of a cold war between the board room and some of our biggest political parties?

To add the most successful countries are those that maintan a stable consensus between there business and wider communities. Given the excessives that businesses have indulged in over recent decades I think it is the business community that needs to adjust in order for consensus to be restored.

I would qualify that to large businesses and especially foreign owned.  I think lots of small NZ businesses are in a competitive market and just dont generate the monopolistoc returns the "big boys" get.
regads

'That'll learn ya!'
 
Norfolk slang for 'that will teach you'.
 
Teach me what? I find myself alone in the wilderness in respect of an analytical if not an official response to recent MoM developments. Rod Oram concurs.
 
Fisher Funds? "We are not giving clients personalised advice on MRP shares."
 
But no shortage of waffle without substance from Carmel herself.
 
For me, the positive takeout of this slightly more volatile than usual week, is that markets can and will still get jittery from time to time, but they can similarly come to their senses once they realise there is nothing fundamentally wrong. We've come a long way since the bad old days.
 
Certainly not when the US Federal Reserve settled the delivery of ~ $55.0 billion credit into primary dealer accounts in exchange for mortgage backed securitues on Wednesday. And more to follow.

Did you see BF's work in the herald:
http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=108...
This first reason for doing nothing:
• The recent rise in electricity prices has occurred while the sector has been majority government-owned. The best way to create a competitive environment would be to have all of the electricity generation companies listed on the NZX.
This took our breath away. The only competition would be/is the race to increase pricing...
 
Summary of the market rules are here:
http://en.wikipedia.org/wiki/New_Zealand_electricity_market
and
http://www.ea.govt.nz/act-code-regs/
http://www.ea.govt.nz/act-code-regs/code-regs/guidelines/
http://www.ea.govt.nz/act-code-regs/code-regs/rio-tinto-agreements-summary/
 
 

Plan:
 
The growth of NON renewable Electricity generation is capped to a fixed % p.a. (not too harsh and also depends on number of customers served). Non-Renewable energy can be added but it will be Penalised heavilly above the % allowed.
 
The "supplier" HAS to provide the end customer with the power they need.
End Customers can still move to another supplier to encourage competiton.
 
Penalties will start to bite after a certain amount of time... and the "cheapest" option is for the generators to build more renewable generation OR hand out free light bulbs, insulation etc.
 
Would involve re-orgaising the electricity sector again!
 
The distribution network is Natiolised and is handed totally seperately.
 
BUT; Why Not?
...
What is also sad is that Germany has subsidised (20years guanteed  purchase price for the electric) their people to install Solar Panels and now they have 50% of the installed panels in Europe.... Where is NZ? hardly a world leader in this....

A few things are likely...power demand by households for some time to come will be flat at best due to tech advances and improved insulation of homes. The power hungry TVs and computers of the past are dead and gone...LED lighting is the new age way to save...transmission improvements are certain, bringing reduced losses.
The rush to flog the SOEs was to scalp savers wanting fat divs, while the socialist power hikes lasted.....the worst increases were through the Labour farce period. Key and the rest knew the profits would not last. Ditto the coal prices but on that score events moved too fast for them.
Now the govt faces reduced returns on flogging the 49%s...a need to borrow more to fill the hole...an inability to produce the much promised surplus before the election...and a bloody angry electorate that has woken up to being shafted by govt on power charges for 13 years.
Must be a good time for the SOE power bosses to receive big fat salary rises similar to the flunkies on the boards.
Why are we always confronted with arrogance when we have National govts, coalitions or not!
 

Re flunkies on boards; surely not those upright citizens who had the ill fortune to be Directors Who Did Not See Anything Coming. Directors of Feltex, Capital and Merchant Finance and Farming Systems Uruguay perhaps. Check out the Mighty River Power prospectus and the backgounds of their esteemed  directors. And Weep. Has Bernard not spotted this do you think? Bernard! Where are you?

We are interested because: Its about water the one resource we are blessed with:
For the market/NZ Inc folk its really simple:
 
Rain is collected to provide energy (our power production relies on no expensive feedstock)
Rain enabes pasture to grow
Rain sourced energy enables the cows to be milked and milk t be processed (F's coal mine accepted).
The bilateral trade agreement wih China provides a home for milk products.
 
Prescriptive costs through market failure or rent seeking/regulation gaming entities have no place.
 
We must ensure that our energy/electricity blessings are avalable to all business and residential users (as Reg would say: RIO (terms) for all).
 
Blessed are the cheese makers....
 

Well I have been thinking about utilising some of my beer making equipment to make cheese but the cost of milk means it is cheaper to just buy the cheese. But a blessing from Henry might just help tip the scales :-P

If the prospect of saving $25 a month is enough to change a govt then we need not look to far to find why our economy is sinking down the gurgler.

I think it's more Labour/Green proposal are actually in the interest of common New Zealanders, as opposed to nearly all of National's policies which seem to only be for the benefit of the top 5% while the rest get left on the proverbial scrapheap.

Plutocracy - the gross generalisation from hell

GrantA - it has been noted herreabouts, that suchlike comments emanate from the weaker argument.
 
Pluto is right; it's a fact that those who would be shareholders, must by definition be a minority. This move is to disinvest the majority of current shareholders; fails if it doesn't.
 
So the Green/Lab approach will always garner more votes - and angry ones at that - than the approach which seeks to feather fewer nests.
 
BH is right - this is shoulder that tips the balance, and starts the boulder rolling. The Nats are gone nest election.
 
The problem is; who would want that poisoned chalice? No term past Peak Oil was ever going to be a good term to govern, whilst the mass are kept in the dark as to the reason things are stalled/reversing.

But is it the game changer that will see Key head for the lifeboat before the ship sinks?

If he thinks it is, he will.
 
If he does, it is.
 
:)

whilst the masses are kept in the dark as to the reason things are
 
That about sums it up PDK - in more ways than one

You want a game changer?
Use some of those super profits to provide Feed-In-Tariffs of 2:1 or 3:1
Then you would see the game change

just one little point that seems to be escaping people - the proposal to create 5000 new jobs to do  what exactly  produce and ditribute the same amount of power to the same amount of households and businesses ?
 
not sure that Labour and the Greens will be able to save $300 of peoples bills if they keep increasing the overheads at this rate ... the inefficiency of a Labour government  repeated across every department and SOE might cost another $5000 a year in government salaries!

Noooo, the thinking goes a bit along these lines .. there are 1.6 million homes in the country at $300 per household that's an injection of nearly $500 million into the economy, and if it circulates at least 3 times that's an injection of $1.5 billion which should go some distance towards creating jobs, so long as of course the households don't simply use the savings to pay off existing debt.

kpnuts,
I had noticed that as well, and believe they were talking about the likely jobs that would be created by consumers generally having more money, spending it on something and creating demand within the economy.
If the new Powerco needed more than 20-30 staff to trade between generators and retailers, then I agree with you, it would seem like a new somewhat inefficient bureaucracy.

You can work that one backwards. Conventional economic thinking is $1 circulates 7 times before it is exhausted. If the average household spend on electricity is currently $3000 pa and that has increased by 70% in the space of a few short years it gives you some idea how much economic activity has been drained from the economy by the government itself, and by extrapolation how many jobs it has cost the wider economy.

The Mighty River Power CEO's resignation letter in the event of Labour and the Greens being elected:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10878774

The flaw in Mr Heffernan's thinking is that the government built the infrustructure in the first place. Funny how Heffernan thinks nothing of taking an obscene salary that is generated from something built under a socialist model.

Well, tying a few a these strands all together, how's this for a scenario:
 

  • Let the power kerfuffle play itself out (the Nat's response is of course:  'Vote Labour, get yer Greens into the bargain'  - careful what you Wish for!
  • Let Tiwai Point close and consider what to do wiv 15% more elec-a-tricity (to use Cap'n Beefheart's characteristic pronounciation).
  • Personal and freight transport......a Prius in every garage!  A 'lectric choo-choo on every Track.  A Trolley-bus on every Street!  An electron-propelled Scooter for them as likes Wind in their Face and Bees in their Teeth.
  • Peak Oil?  Schmeak oil......

 
Am I right?  or am I right?
 
And as that aforesaid 15% Energy is already There, the EREOI fades away to a Sunk Cost mutter.

There is a synergy that with the Lab/Greens offering there is a potential surplus of Meridian power ex smelter in conjunction with Transpower coming to the party with a trunk extension.
 

Pray tell - what *actual* financial metrics make these profits super?  Forget about the absolute size - some industries have at face value massive profits but can be quite small and insufficient if put as a numerator over its funds employed. 
 
So what metric do you have for us here that the earnings are too high?  As you notice - the rate of inflation has come down significantly.  I do have some sympathy from comments made by senior management at these companies that new investment in new facilities etc would cease under this labour/green scenario - do you relish or at least concede that this might stop all investment in expansionary capex and NZ may be left with an old infrastructure? And following that logic even more expensive power in the long run?
 
I'm not blasting you - I just want more solid support if you are going to make this argument.

KS you might want to reconsider your question in light of the revelations set out in the study noted in this publication.
 
New Zealanders pay substantially more for power than consumers across the Tasman.
 
 
In 2010, Australians were paying 14.83c per kwh, while in New Zealand power was retailing for between 22.7c and 24.97c per kwh.
 
Bertram said that for several years, power companies were revaluing their assets on paper and using that as a basis to increase their prices.
 
A profitability analysis of Meridian, Genesis and Mighty River conducted by Ernst and Young in 2011 estimated that economic profit totalled $3.8 billion between 2002 and 2011, on total revenues of $42 billion.
 
Their invested capital rose from $4 billion in 2002 to nearly $12 billion in 2011 but most of this increase - $6.2 billion, according to the companies' annual reports - was asset revaluations, with less than $2 billion representing the historic cost of net actual investment.
 
Those increases in asset values went untaxed but made their returns on investment look low, which justified price hikes, he said. Genesis did not want to comment on the revaluations and Mighty River said it was a question for the Electricity Authority.
 
But while consumer prices have soared, industrial power prices have remained stable and commercial prices have dropped.
 
Bertram said it was because residential customers didn't have the power of big business.
 
"It's open season to screw anyone who can't fight back."
 
But he said nothing that was being done was illegal, because companies were free to operate in a way that maximised profits.
 
"If it's highway robbery, we lock those guys up. But if companies put a gun to your head and take your money, it's knighthoods and bonuses for the CEO."

Excellent extract Stephen Hulme.
Super profits are there for sure.  And Bernard is correct that a line has been crossed.  The National Party has not promoted markets at all.  Rather it is a poodle to protected interests.  As the Labour party was to unions in days gone by -remember cooks and stewards -
I consider myself a right wing voter.  I would love the national party to go to work on those protected interests and sort out the ripoffs New Zealanders have experienced at the hands of the protected industries.  Electricity in this case.  But think also big banks, the two supermarket chains, petroleum and building supplies.  We can't afford this protectionism. 
The Labour Party is doing Nationals job here.  While a single power purchaser  seems a bit Stalinist, we aren't seeing any interest in the issue from National.
 
 

NZ'ers pay a lot more than Australians or Americans on some things - and likewise we pay less on others.  That isn't proof of a conspiracy either way.  And you aren't earning any debate points for providing a politically motivated article as evidence. 
 
Regarding your comments and revaluations.  Power companies revalue their assets on a mark to basis asset.  Just like wine companies.  or horticultural companies.  It's not a trick - it's IFRS - it's an accounting standard.  In fact it's a new accounting standard implemented by left leaning legislatures to add more transparency (the actual impact has been the complete opposite in my view).  The comment that companies revalue their assets upwords in order to justify higher prices and keep the return on assets appropriate is a very flippant and uniformed one.  The comment about those increased valuations going untaxed is a stock standard class warfare type statement.
 
Take the same example of say rental return on an investment property.  The historic net cost of a house purchased 20 years ago would be a fraction of what its current market value is.  Clearly land and asset prices have increased.  So when doing an analysis clearly it is more appropriate to look at the current return on the current value of those assets.  Likewise - it doesn't reflect replacement value.  Labour prices were a fraction of what they once were.  Land value is fraction of it what it once was.  So obviously the current market value and or replacement value is a lot different.
 
None the less - what you imply that should be done, and the leanings of BH - represents nothing less than a major major major intervention by the government.  That's fine - but it's a big deal - a really big deal.  And you can't rock up to the debate with nothing to offer other than emotion - you need indepedent facts and analysis to convince others.  Whole sections of micro economics are devoted determining what are fair economic returns in less competitive industries.  And perhaps take a step back -  it's clearly not a cartel - looking at the number of people that switch between providers.
 
It's a big issue that should be debated - but it would be far better if the people stepping up to scream into the microphone were doing it in a balanced way with actual balanced figures and analysis.

Think you are right BH.
National's thin margin for the next Govn will or has slipped away IMHO.   The referendum on Asset sales will nail JK/National I believe this time around...
regards

I wonder why the last year of power price rises crossed the red line when the 79% price rises under 9 years of Labour did not?