Herald on Sunday editorial: A long wait for cheaper power

Energy companies warn that current power prices are 'unsustainable'. Photo / Thinkstock

Remember how the reforms of the electricity industry were going to make power cheaper? Max Bradford, the Energy Minister in the Shipley Government in the 1990s, practically went hoarse telling us how splitting ECNZ into three SOEs - Genesis, Mighty River Power and Meridian - and separating line and retail-energy businesses, requiring retailers to buy power to onsell, would be a good deal for the consumer. The consumer is still waiting.

Now the wholesale spot market can have price spikes of up to 150 per cent, as happened in December 2010, and home power bills virtually doubled in the first decade of this century - increasing at three times the rate of inflation over the same period. The big four generators, meanwhile, warn that current power prices are "unsustainable" - by which they mean that they are too low.

But a Commerce Commission report drew on an analysis by Stanford University economist Frank Wolak, which assessed the cost to the consumer of overcharging by power companies at around $4.3 billion over six years - or $1000 for every man, woman and child in the country.

This is excellent news for the companies' shareholders. The problem is that, with the exception of Contact Energy, which is publicly listed and 51 per cent owned by an Australian company, the power companies have only one shareholder: the Government. So a good chunk of that $1000 (and rising) that we've all overpaid has ended up in Government coffers. It takes some gall for politicians who swear by the "user pays" principle of modern neo-liberal economic orthodoxy to preside over a system that makes families, beneficiaries, the aged and the infirm pay $1000 for something they haven't used.

All this becomes particularly significant given the Government's plan to sell off part of the three remaining power companies, starting with Mighty River Power, probably in the third quarter of the year. The Prime Minister, who prefers the anodyne "partial privatisation model" to the more tarnished terminology "asset sales", claims the election result was a mandate for this plan, despite several scientific polls that show between 65 and 75 per cent of New Zealanders were opposed to the sale plans.

This is nonsense. The Government has the thinnest of majorities and John Key cannot know what proportion of National support was from voters prepared to back the party despite rather than because of its asset-sales policy.

And they are assets that will be for sale. A report by accounting firm Ernst & Young has shown the companies earmarked for this "partial privatisation" have out-performed most similar private-sector companies in their returns to shareholders and generate returns far higher than the cost of owning them. The argument in favour of retaining strategic assets is not a sentimental one, but based on good business sense. The most economically illiterate Mum and Dad investors know that it makes no sense to sell an asset and retire debt with the proceeds, when the asset is generating more in dividends than the interest they are being charged on the debt.

The sale plans work well for the Government and business: the books will look better come the next election and a lot of fund managers and investors will make a lot of money. But Key, who said that the sales would allow the companies to "reap the benefits of sharper commercial disciplines, more transparency and greater external oversight", has been conspicuously silent on the likely effect on prices.

Little wonder. The first SOE to be privatised, Contact, raised prices by up to 12 per cent and doubled its directors' fees during the 2008 financial crisis. Customers deserted in droves but it would be naive to think that, when all the companies are privatised, there will be an escape route to an alternative supplier.

What Key might like to explain is why we should expect the result of partial privatisation to be different from that of corporatisation. Investors - the small-time private ones and the big corporates alike - buy shares to make money and they will expect governance to be profit-driven. Regulation may be a four-letter word in the Beehive dictionary but when significant numbers of people can't afford to turn the heater on in winter, the free market is not working any more.