Raising ordinary capital from the public has been rendered uneconomic for small and medium-sized companies wishing to expand. Changes to regulation of debt securities in response to finance company rorts have over-regulated ordinary capital raising. Public offerings are now, in effect, limited to larger entities.
Prospectus requirements are increasingly expensive to comply with. Onerous directors' duties for issuers make it harder to attract experienced directors to help grow smaller companies. Audit certificates and expert statements become ever more costly. Ongoing costs include more onerous and expensive issuer audits post public offering. These are regulatory problems holding back growth in the economy; examples of needless regulation.
The purpose of securities law is to properly describe risk, not eliminate it. It is in the interests of our small economy that smaller business should be able to expand via public offerings. Excessive regulation now prevents that. Labour is committed to fixing that.
It is an example of a competitive market being constrained by regulation. However, an uncompetitive market is a different beast altogether. If a market is behaving in an oligopolistic manner that is doing significant harm to households, business and the economy there may be a case for regulation. Electricity is one such market.
The evidence of a lack of competition in New Zealand's electricity market is substantial: Average residential power bills have risen by $770 since 1997. The report of Stanford Professor Wolak for the Commerce Commission found overcharging by the four largest gentailers was 18 per cent or $4.3 billion. Prices have increased further since. Residential tariffs have risen more than many other countries and are three times industrial tariffs. Though industrial should be lower because of scale and avoided line costs, the difference is now the second-highest in the world and cannot be properly explained.
Consumers close to physical supply sometimes pay more than those more distant. The million-dollar salaries for executives and hikes in directors' fees show a market not constrained by competition. The list goes on and on.
The "Bradford reforms" were fundamentally flawed in many ways. They left lines - always a natural monopoly - unregulated. Prices increased and there was underinvestment until lines were regulated. The promised competition has not resulted. The main five generators account for 95 per cent of generation and dominate a similar percentage of retailing.
For 15 years power bills have increased at twice the rate of inflation.
The problems go deeper than a lack of competition. The pricing model used means all electricity dispatched is paid the amount of the highest bid accepted. This means our abundant cheap hydro (almost 60 per cent of our generation) is priced at many multiples of the cost of its production. Morningstar has said the cost of hydro generation for Mighty River Power was less than $5 a Megawatt hour, whereas the market was paying about $70/Mwh. Even after a fair return on capital, that's excessive. In effect we allow the owners of old hydro to capitalise into their balance sheet the value of the free public water resource. This is the main driver of the multibillion-dollar revaluations of hydro assets, which electricity consumers pay for through higher power bills.
Labour proposes generators be paid for their production costs plus a fair return on their capital. Generators will be structurally separated from retailers. A Crown agency, NZ Power, will sit in the middle. NZ Power will tender for new capacity under long term contract, the cost of which will be averaged into the market (rather than driving the price of existing low-cost hydro ever higher). The future price track for electricity will be more predictable, helping investors in energy-intensive businesses commit to investing here.
Competition for new generation will ensue. Cost-effective energy efficiency alternatives to extra capacity will be able to be considered (the current system does not allow this). The retail market will also be more competitive than it is now.
New entrants in generation and retailing will increase the range of investment opportunities for those wishing to invest in the electricity system. Many overseas jurisdictions, including a number of States in the US, run similar systems.
Despite this, critics of our proposals have made exaggerated claims comparing Labour to Stalinist states and asserting capital flight will ensue. This will not happen. As our policies clearly show Labour favours a market economy and a competitive market.
• David Parker is Labour's Finance spokesman and a former Energy Minister
