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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