Bernard is an economics columnist for the NZ Herald

Bernard Hickey: Power barons fail to fool the public this time around

Photo / NZ Herald
Photo / NZ Herald

What was the electricity industry thinking?

Did it think it could get away with generating super profits from a network monopoly forever without a political reaction?

In the world of corporate and government relations there's a vague concept referred to as a "licence to operate". It means that large companies or departments know there's only so far you can push the public and politicians before they react by, in effect, removing that licence to operate and regulating profits lower.

Large companies do their best to push their profits to the limits of that public mood and extend that red line through "good works" in the community, such as sponsorships. They also do their best to obscure the extent of the super profits, citing reasons such as financial stability.

But sometimes the sheer size of the profits becomes so obvious that it invites a backlash. The National Government realised the power-consuming public was nearing the end of its tether in 2008, so it acted to force more competition with its 2009 sector review and the very successful "Whatsmynumber".

It helped increase the switching rate over the past couple of years towards 20 per cent. Annual residential power price inflation halved from 8 per cent in the decade from 1998 to 2008 to 4 per cent since then. But it is still running at quadruple the general inflation rate and it's clear that "competition" hasn't worked to reduce or even restrain power prices for voters, as opposed to businesses.

The final straw was the Government's decision to sell 49 per cent of the three remaining state-owned power generators and retailers.

Voters and political parties could previously console or convince themselves that power company super profits weren't such a problem because they came back into government coffers in the form of dividends and higher asset values. In effect, it was another form of tax that was collected broadly, then returned in the form of government goods and services.

The only major outliers were the privately owned Contact and Trustpower, but they were small enough not to matter that much.

The SOE sales programme changed all that. It proposed handing those super profits to the richest New Zealanders in the form of shares and dividends.

That was the moment the Government and the industry crossed that red line and triggered the regulatory backlash promised this week by Labour and the Greens.

What was the industry thinking? That their customers and voters would not notice? The shock of investors realising they had crossed the line and would pay the price was evident in a 12 per cent fall in Contact's share price and a 7 per cent fall in Trustpower's share price. No doubt, the likely price of Mighty River Power shares also took a tumble in the minds of potential investors.

As Labour and the Greens would say privately: "That'll learn ya."

Debate on this article is now closed.

- Herald on Sunday

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Bernard is an economics columnist for the NZ Herald

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.

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