Any day now the Government is likely to announce arrangements for the float of Genesis Energy, the last of its asset sales. It will not be looking forward to it. Its hopes of a good price for all three power companies would have evaporated soon after the float of the first. Mighty River Power shares were issued last May at $2.50 and last week they were down to $1.94.5. The Meridian Energy listing had to be loaded with inducements. Genesis will have to be sold into a market already choking on underpriced utilities.
In purely financial terms another float makes no sense. Unfortunately those are the terms the Government has mainly used to justify the unpopular programme. It has also cited benefits for the sharemarket in what were supposedly gilt-edged offerings. The weakness of the stocks are undermining that argument too. The Government is left now with no choice but to explain the real reason for the asset sales all along: economic efficiency.
That is a phrase often heard but seldom understood. It means the economy is running like a well-tuned engine with all its productive parts receiving the right level of investment - not too much, not too little. Just like an engine an economy depends crucially on its distributor. The most accurate distributor of economic investment is a price for a product in competitive markets.
The real reason for the asset sales, all along, has been to put all four of the big electricity generating companies on the same competitive footing. Contact Energy was privatised by the previous National Government, the remaining three need to be privatised by this one. That is really all there is to it.
If the reason for asset sales was generally understood they might not be so unpopular and there would not be the same urgency to complete the sales programme before a rare government mandate for them expires. The Labour Party, which understands the economic case for them, and the Green Party, which does not, would never pick up the task.
Labour and the Greens are partly responsible for undermining the financial value of the floats with an electricity price-control policy they announced just before Mighty River Power went on the market. They argue that the market is setting electricity prices too high and that a public body could set a more economic price.
Last month the industry's public watchdog, the Electricity Authority, issued a study of the industry's historical costs that found prices were not out of line today. It had recalculated historical costs as though the old state electricity department had used corporate accounting as modern state-owned enterprises do. In simple terms, it had added a standard profit margin to the historic costs.
Profit is another misunderstood mechanism in the tuning of an efficient economy. If investment is going to flow to the right places in the right amount, the price of all products needs to include a standard profit margin. Long ago, when most of the dams were built, nobody thought about economic efficiency. Governments made investments and prices were set without a thought for the return the capital might have earned elsewhere.
One of the legacies of that era is the Tiwai Pt aluminium smelter which is New Zealand's single largest consumer by a wide margin and has never paid an economic price for its power. Its threat to close, made just before the Mighty River float, is another reason the asset sales are a financial flop. But that is no reason to stop them. Quite the opposite. Tiwai Pt and the Labour-Green pricing proposal are two good reasons for the Government to privatise the last of these vital economic assets while it can.
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