Monday, 22 April 2013

NZ Power, the folly of the NZ Greens and the NZ Labour Party

I really don't know what to believe with this one. Greens/Labour announce a policy to create a new govt. entity called NZ Power to compulsorily purchase all electricity from producers at a set rate, to then on-sell to the electricity retailers.

Am I confused about whether it is a good idea or a bad one? Nope. It is a total idiot of an idea, an absolute pearler of economic vandalism (to borrow a phrase from Cameron Slater at Whaleoil). What I am confused about is whether this is a genuine loopy left, command economy, let's reintroduce failed socialist economics kind of policy, or if this is an inside job by the big boy corporates to allow them to continue hiking prices and offload the PR damage onto the government of the day?

So allow me the privilege of talking myself through it all. Just to clear my mind, to make sure I have things straight.

As a clear disclaimer, I am dead set against the sale of state assets that produce, year in, year out, dividends to the State. No brainer. Keep em, they are making a buck. Why? Because the dividend means your and my direct (PAYE, GST etc.) and indirect tax (Government borrowings) are kept down.   Good thing that, because I can control my electricity usage (and hence cost) myself, but I can't control my PAYE rate (that is an Act of God, as an insurance company would say).

So what will NZ Power do? Basically, it will sit in between the producers of electricity (the hydro dam, windfarm, thermal power plant etc. owners) and the retailers of electricity (Genesis, Mercury, Meridian etc., you know, the nice logos on your power bill). NZ Power will "negotiate" a rate for electricity from said producers, and then sell all electricity at said rate to the retailers. By virtue of its monopoly on raw power purchase, NZ Power will be able to get a "discount" rate; how they calculate that discount is yet to be seen.

As an analogy, if we had a Government entity called "NZ Bandwidth", it would compulsorily buy all of the internet bandwidth available within NZ (from Chorus, United Networks etc.), and then on-sell it to bandwidth retailers (your ISP; Vodafone, Orcon, Slingshot etc. you know, the nice logos on your internet bill). Because NZ Bandwidth is the only authorised purchaser, the idea is NZ Bandwidth gets to negotiate and set the price, which should be cheaper, right?

Makes sense for all of about 15 seconds. Nah, not even that.

The argument for NZ Power has so many holes in it I am sure you could make money from a windfarm on the other side.

Firstly, the primary economic argument the Greens/Labour had against selling Mighty River Power (MRP) was because of the dividends it produced for the state. In short, it made a profit, and from that profit paid out handsomely to the government, year in year out. Just like the other SOEs in the electricity sector (Genesis, Meridian etc.). That's good, right? Because it keeps our direct taxes (PAYE, GST etc.) down.

Well, now NZ Power will directly reduce those SOEs profits by demanding a reduction in electricity prices, reducing the dividend to the State. Meaning either increased direct taxation, or increased borrowing by the government (a tax on you and me in another name, because it is still us (or our kids/grandkids) that have to pay those borrowings back). In effect, what they reduce (if anything) from your power bill, they will have to claw back somewhere else.

Shot in the foot #1. Don't sell MRP because it pays such good dividends. Introduce a policy that guarantees lower dividends.

Secondly, your, my and the Governments balance sheet damage. All of us who have Kiwisaver accounts, all of our grandparents who have small superannuation schemes or private shareholdings, they are likely to hold one or more NZ Electricity company. And they will be hit. Contact Energy went from $5.80 pre-announcement, to $5.15 post announcement. That's a 12% drop on a possibility that the NZ Power proposal will come true. At the same time the Government (i.e. you and me) owns 51% of these companies; that is a balance sheet hit for them (i.e. you and me) too! God forbid that Labour/Greens should actually make the Government benches; if it looks like a Labour/Greens win get your money out fast.

Shot in the foot #2. Promote debt reduction, personal savings and Kiwisaver. Introduce policy that promotes debt increase and damages personal savings and Kiwisaver.

Thirdly, what if the electricity generators don't like the price set by NZ Power? What if a company says "Nah, that price is too low, we can't make a buck on that. Stuff ya, we will just turn off the switch"? As a business, do you have to sell to me at a price I set? No you don't. It may make more economic sense to just mothball the hydro dam for the meantime until prices rise. And remember, NZ is a small country. All of the Boards (and probably most of the senior management) of the electricity producers in NZ will be on a first name basis. You think they won't talk to each other, discuss strategies, look for ways to maximise their returns in a fiat environment? Of course they will, thinking otherwise is just head in the sand stuff. After all, that is their job, to run a business to maximise return for their shareholders. Which, paradoxically, means they will be fighting against the Government (their shareholder) because they want to give more money to the Government! How nuts is that? Much like the Great Depression, when food rotted in the ground because it wasn't economic to harvest and transport it while people starved in the streets, water will be flushed from full dams while we suffer through power cuts.

Shot in the foot #3. Sorry, left and right foot shot out from underneath me. Nothing left to stand on.

Which leads me to the conclude the following. Neither the Greens, nor Labour, should be stupid. Most of the people who have made it into the higher echelons of their respective parties should (in theory) be quite smart. But they desperately wanted to derail the MRP sale. I (the author) am personally 100% against the sale of dividend producing state assets (such as MRP). But I cannot go past the destruction in value this NZ Power policy creates, and the fact that it will never lead to lower power prices.

Ask yourself, when was the last time a Government enacted a monopoly on something and prices went down? Ummm, errrr....

So the REAL question is, WHO BENEFITS FROM THIS POLICY? You and me and our power bills? Debatable, as outlined above, what we don't pay in power bills we will have to pay somewhere else. Shareholders? No way, already seen destruction of value on just the possibility this becomes real! Electricity security of supply? You gotta be joking, if it was my business and I couldn't run at a profit I would turn it off too.

So I have to conclude that the only ones who can possibly benefit from this policy, are the electricity producers themselves. No Government will ever risk a price induced (read politically induced) power cut; it is political suicide. But price hikes? Oh well, that can be explained away.

Should NZ Power be enacted, any power price hike will no longer be the producers problem. It will be NZ Power (i.e. the Government's) problem. Entire corporate PR departments can be eliminated. Mercury, Contact, MRP, all of them no longer have anything to fear from the public. "The Government sets the price" they will say. The subscript being (and quite rightly so), "If we don't like the price, we just turn the lights off". The electricity producers must be sitting there laughing their heads off.

And if Manapouri or Clyde Dam should fail? The destruction, the devastation? I can see the first press release now: "NZ Power forced rates down so low we could not keep up basic maintenance".

The whole point of SOEs (i.e. Govt. owned businesses, not forgetting that Govt. owned means you and me owned) is to create responsibility; to create a business that looks both to its profits today, and to its maintenance in the long term, as a protector of shareholder value and long term infrastructure reliability as a return on investment (your and my investment, through our taxes that paid for it in the first place).

Look at it seriously, and ask yourselves "Who actually comes out better off?" Power prices will continue to go up; the cost of production and the maintenance of the infrastructure has to keep going up. Just common sense. But the blame for any failures can be shifted.

Labour, Greens, you've been had, big time. Someone has done a magnificent inside job on you guys. You were just so keen to derail the MRP float, and someone came along with a solution, but you couldn't see the dam for the water. So you gave them the perfect answer to their problem of how to absolve themselves of any responsibility for increasing power prices or lack of maintenance. Sucked it all up, headwater, dam and turbine.

And you, fellow voter? If you vote for the advocates of this policy, then you are a sucker. As you read this article, I have no doubt the leaders of the power companies are supping on Chateau Lafitte, congratulating each other on the greatest hoodwink in NZ's political and economic history.