Richard Inder: Poverty of thought comes in many guises

One of the most crushing features of poverty is the extent to which it encourages its victims to think their disadvantaged position is in concert with the natural order.

Poor people are inclined to regard those with great wealth as criminals simply because they fail to understand how wealth is acquired.

They fail to see it is the product of high-quality education, generally healthy living, commitment, love of life and risk-taking.

Perversely, the poor sport their dilapidated houses, beat-up cars, bad health and grinding work as badges of honour - signs of honesty, hard work and fair play.

It is for this very reason that rising international investor concern over the recent, draconian regulation of critical energy infrastructure will be dismissed.

Politicians and, more worryingly, the public at large will treat warnings that international investors are growing wary of investing here as game playing.

This is the voice of the Kiwi battler: "Financiers in the world's capitals only care about milking us consumers. They don't like [Commerce Commission chairwoman] Paula Rebstock because she is sticking up for us - go get 'em, Paula."

The argument is riven with holes.

First, the threat is very real and very serious. Since the commission this week threatened electricity lines company Vector with price controls, I have been inundated with anecdotal reports of international investors putting investment here in the too- hard basket.

Goldman Sachs JBWere voiced the sentiment: "Investors in New Zealand infrastructure should now require a material uplift in expected returns to take account for the dramatic increase in risk."

New Zealand runs an enormous current account deficit, which for the layman means our standard of living depends on the goodwill of the financiers in Tokyo, London and New York. A 0.25 per cent premium on their current lending rates would have a huge cost on the local economy.

Investor concerns about this country are not without reason.

The commission's justification of its threat to Vector is also not beyond question. But the odds are stacked in favour of the regulatory body when it comes to winning a debate about the merits of its actions.

Rebstock can come out with stunning pronouncements - as she did this week - that Vector is charging small factories in Wellington $18,000 a year more than is fair. The numbers are easily digestible and make compelling headlines.

The rebuttal of her arguments depends on esoteric concepts such as whether the commission has set at an appropriate level the amount natural monopolies such as lines companies should be able to earn on their investments.

The figure is critical. If, say, 9 per cent is selected as the appropriate return (instead of the 7.35 per cent benchmark used by the commission) the Wellington factory may not be paying too much extra at all.

Vector can also make a sound argument that 7.35 per cent is too low.

It is clear Vector is already operating on wafer-thin financial margins and - more to the point - that it is deprived of the necessary certainty to make the sort of long-term investments that are its stock in trade.

It is also not clear how a return of 7.35 per cent is in line with a new Government directive this week that the commission choose "commercially realistic" rates of return and "take full account of the long-term risks to consumers of under-investment in basic infrastructure".

(The order, part of the Government Policy Statement on energy infrastructure, is a key policy directive which the commission and the Electricity Commission must take into account.)

The commission's actions, although dramatic, should in fact be the least of international investor worries. At least the commission's independence is enshrined in law.

Cabinet papers detailing Energy Minister David Parker's contribution to the aforementioned policy statement this week showed the Electricity Commission enjoys no such luxury.

They disclose that Parker, frustrated over the delays to the 400kV line through the Waikato to Auckland, suggested the Cabinet take over planning of the national grid. They also disclose the Cabinet discussing how it could instruct the energy regulator to approve any power project the politicians deemed worthy.

Frankly, it will be no surprise if the fiercely principled Electricity Commission chairman Roy Hemmingway decides to walk when his contract expires next month.

In one stroke, Parker dispelled any illusions Hemmingway held over his independence and left him in an intolerable position.

The commission was set up and Hemmingway appointed just over 2 years ago in an apparent attempt to impose on these critical decisions robust and dispassionate analysis.

Now the very administration that created the beast is refusing to back it at the moment of its greatest need - hardly a response to inspire investor confidence.

The 400kV line is the first major transmission upgrade in more than 10 years and is always going to be contentious.

Over the approval process, Hemmingway appears to have acted within his mandate - and although government insinuations of relationship problems between him and Transpower cannot be ignored - he is, in some measure, taking the flak for the national grid's poor planning processes.

Moreover, the Government admitted it had not given Hemmingway proper directions when, as part of the policy statement, it asked him to take greater account of its aim to boost the amount of energy generated from renewable resources.

The Government should back Hemmingway.

The alternative of taking control of the grid, which means the end of the electricity regulator, will certainly do little to foster enthusiasm for New Zealand as an investment destination.