Bernard Hickey 's Opinion

Bernard is an economics columnist for the NZ Herald

Bernard Hickey: Rates and power bills to blame

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Huntly Thermal Power Station. Photo / NZPA
Huntly Thermal Power Station. Photo / NZPA

Local governments and electricity companies are to blame for New Zealand's inflation rate being much higher than it should have been for the past 10 years.

They have raised their prices between 5 and 8 per cent each year for the past decade, despite being semi-regulated and mostly publicly owned.

Although the rates have trended down since 2004, they are still much higher than the Reserve Bank's 1 to 3 per cent inflation target. And that persistent inflation has acted like a type of plaque in the arteries of the economy, putting up its blood pressure of inflation, interest rates and the exchange rate.

Without that persistent inflation at two and three times the rate in the rest of the economy, New Zealand's interest rates and currency would have been significantly lower.

I've always wondered why Reserve Bank Governors Graeme Wheeler and Alan Bollard haven't convened a conference of mayors and CEOs of councils, electricity generator-retailers and lines companies to read them the riot act.

These mayors and CEOs no doubt believed they were doing the right thing for their shareholders, ratepayers and customers.

They argued they needed to increase rates and electricity prices to justify investing in infrastructure that had been under-invested in through the 1980s and 1990s.

Councils said they had extra responsibilities under the "four well-beings" policy of the 2002 Local Government Act to improve the social, economic, environmental, and cultural well-being of their communities.

Electricity generators, lines companies and Transpower argued they needed to lift prices to pay for extra generation and more reliable networks to ensure the five-week power shutdown in central Auckland in 1998 never happened again.

These were all laudable aims. But the consequences were much worse than the benefits gained. These two uncompetitive sectors imposed a massive price on exporters and those competing with imports.

The Reserve Bank's hard-wired focus on keeping inflation between 1 and 3 per cent meant it had no choice but to react with higher interest rates that helped make the New Zealand dollar 10 to 25 per cent over-valued relative to commodity prices and our current account deficit.

This crunched the size of New Zealand's tourism sector down from almost 10 per cent of GDP in the early 2000s to around 8 per cent now.


Their persistent inflation has
acted like a type of plaque in
the arteries of the economy.

Manufacturing's share of the economy has suffered a similar fate.

In response, and unlike the local government and electricity sectors, these tradeable sectors rolled up their sleeves and whittled down costs. They came up with innovative ways to use technology and have improved their productivity.

It need not have been like this. In any area where there is no competition, the regulators should keep the pressure on to improve productivity and ensure the price-setters don't just increase prices to solve any problem.

Until recently, local government fees and charges were essentially unregulated. In theory, the electricity industry is regulated by the Commerce Commission, but its mandate was to ensure generators and lines companies didn't make too much money and ran reliable networks. There appeared no mandate to keep price inflation under control.

The best example of where regulation did work to bear down on prices was telecommunications. Repeated and persistent interventions to ensure number portability, the breaking up of Telecom and the encouragement of mobile competition all helped to keep inflation low and actually create deflation since 2011.

The Reserve Bank refers to this structural fall in telecommunications costs as the "2 Degrees effect" and it has helped keep interest rates low since 2008.

If only the Reserve Bank could encourage regulators, politicians, ratepayers and voters to intervene as effectively with local governments and electricity companies to create many more such "2 Degrees effects", New Zealand might not have the structurally inbuilt high currency and interest rates that are so damaging to the real economy.

A summit might do the trick, if only to shame these two culprits into acknowledging the pain they have caused consumers and producers.

- Herald on Sunday

Bernard Hickey

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 Interest.co.nz 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.

Read more by Bernard Hickey

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