Earlier this week, a Herald editorial suggested people thinking of buying Mighty River Power shares had little to fear from David Shearer's statement that the Labour Party planned to shake up the electricity market when next in power. That, however, was before it was known how far back in time Labour planned to travel and how errant its policy would be. The details, released yesterday, have serious implications for the profitability of the state-owned power companies to be partly sold by the Government. A 3 per cent fall in Contact Energy's share price soon after Mr Shearer's announcement confirmed as much.
Labour proposes to set up a single buyer, NZ Power, to purchase all electricity generation at what it deems a fair price, based on the actual cost of production. This, it says, will reduce the average household's power bill by between $230 and $330 a year, a 10 per cent drop. Among its myriad functions, NZ Power would also be able to direct generators to use available capacity, and play a key planning role, including determining future investment needs for both generation and transmission. It would run a tender process for new generation, signing long-term contracts, so successful bidders received what was considered a fair return on their investment.
This suggests nothing less than a return to central planning. It harks back to the situation that pertained before the electricity industry was transformed from a state monopoly into a market supplied by four main generating companies. Mr Shearer seems to be looking at that time through rose-tinted glasses, ignoring the inefficiencies and, most notably, the blackouts that were a feature. He is also disregarding the fact that price controls always have unintended consequences that may be economically hazardous and socially unjust.
The last Labour Government understood this. Rather than kill the market model, it tried to make it work better. It inserted an Electricity Commission, part of whose job was to ensure the market worked properly. It is fair to say this has not been fully achieved. As Mr Shearer noted, electricity prices in this country have been rising faster than those in major competitor nations. Three years ago, the Commerce Commission attributed that to the power companies taking advantage of the opportunities created by the design of the market, "a lawful, rational exploitation of the ability and incentives available to the generators".
The most unfortunate aspect of Labour's new policy is that it has identified the problem. "When markets are not truly competitive, excessive profits are extracted from consumers," David Parker, the party's energy spokesman, said yesterday. The most logical response, however, is not to return to a failed approach but to provide the setting for competition to flourish. Despite all the criticism of price rises, the market has succeeded to the extent that there has never been a power failure. It also has the framework that offers the best outcome for consumers.
