By Bernard Hickey
The government made two big decisions this week that will boost corporate profits and keep some jobs at the expense of not passing on lower prices to every New Zealand household.
These inflationary decisions will also pump up the pressure for higher interest rates slightly sooner than later, which would increase borrowing costs for many households and businesses.
Firstly, Communications Minister Amy Adams over-ruled the Commerce Commission's move announced in December to cut the cost of regular 'copper' broadband by as much as NZ$12/month.
Instead, prices will fall between NZ$2.48 and NZ$7.48 a month, meaning New Zealand's 1.25 million broadband households will miss out on as much as NZ$140 million a year in reduced broadband charges.
Falling phone charges, internet connection fees and mobile phone charges have been a significant factor dragging down overall inflation over the last 7 years. Statistics NZ figures show overall telecommunications costs have fallen 15% since mid 2006.
This helped offset a 40% rise in electricity costs over the same period.
Adams argued that a smaller cut in copper broadband prices would help give Chorus and others the certainty and the incentives to keep investing in and rolling out the new Ultra Fast Broadband optic fibre cable, which the government itself has pumped NZ$1.35 billion into.
The danger for Chorus was that under the Commerce Commission ruling copper broadband prices would be much lower than the optic fibre broadband prices, reducing the incentives for households to switch.
Chorus' profits would also be much lower under old plan so Adams' decision to over-rule the regulator was welcomed by shareholders.
The value of their shares has risen almost NZ$300 million over the last month in anticipation of this decision.
The second government decision this week to benefit shareholders and some workers at the expense of consumers in general was NZ$30 million payment to Rio Tinto and Sumitomo to keep the Tiwai Pt smelter open until at least 2017.
It argued this is a small price to pay to keep 3,200 Southlanders employed and pumping NZ$1.6 billion a year into that regional economy for that next three years.
The income tax and GST generated will dwarf that one-off upfront sweetener.
But at what cost to consumers?
Analysts have forecast that a Tiwai Pt closure could reduce wholesale prices by anything from 10% to 30%.
How much of that might be passed on to consumers is anyone's guess, given the variables of transmission costs and just how competitive the retail market is.
But even Meridian CEO Mark Binns said his modeling showed a significant reduction in prices for consumers.
Binns also said the government's decision would be viewed positively by investors and hinted at significant increase in Meridian's value when it releases results on Monday.
Even a 5% increase its value would be worth NZ$300 million.
Meanwhile, a 10% reduction in retail electricity prices would cut costs for New Zealand's 1.7 million households by about NZ$290 million.
Governing is always the art of balancing off competing interests to maximise the well being of all New Zealanders, or at least to get re-elected. But this week the government came down on the side of the short term interests of specific groups, rather than the longer term benefits for all consumers, essentially hoping that voters wouldn't notice.
Chorus shareholders, power company shareholders and workers in Southland have benefited from higher share prices that could be worth over NZ$600 million, while power and broadband consumers now won't see the benefits of price cuts worth over NZ$400 million a year or about NZ$4.50 per week per household.
Meanwhile, the Reserve Bank may have to increase the Official Cash Rate just that little bit earlier because it won't be able to count on the deflationary effects of a 10-20% reduction in power and broadband prices.
That will eventually cost both businesses and households that borrow.
A 25 basis point hike in interest rates costs a household with a NZ$200,000 mortgage around NZ$10 a week.
This week's decisions, therefore, may have cost each household about NZ$15 a week.
The government is no doubt hoping households and voters won't notice too much amid the distractions of the celebrations in Bluff and in the boardrooms of Chorus and Meridian.
This article was first published in the Herald on Sunday. It is used here with permission.