Chris Barton: Power competition needs proper regulation

File Photo / Greg Bowker

Let's throw the switch on the spittle-flecked rhetoric by business commentators and the government about the Labour-Green proposals for electricity market regulation. When you do that, it tells a very different story.

Labour and the Greens "have poked the borax right back up" the free market "mafia" which has raped and pillaged New Zealand consumers for over a decade. In one madly brilliant swoop this "stark, raving, Monster Loony Party" has helped the scales fall from our eyes.

One commentator's "stink bomb" let off by the proposal is another's "breath of fresh air". And if turning back the clock on "half-baked" failed reforms constitutes jumping the shark maybe that shark should have been jumped a long time ago.

Claims of "ambush" and "sabotage" of the Mighty River Power float might be seen as ways to say we don't need to sell the family silver and to promote real competition in the market. As for the ghost of Hugo Chavez, perhaps the spectre, terrifying for some, that's really before us is that of New Zealand customers getting a fair go. The overall message could be we now see the free market emperor, bloated by greed, struts with no clothes.

That's a lot of mixed metaphors, but they're not all mine. I speak up here as one who has watched and commented on the telecommunications market for 20 years. The parallels with the electricity market are so bleeding obvious that one is left bewildered. Will we never learn? Real competition needs real regulation. Amid the hubbub of over-the-top damnation, a few considered voices have pointed out much the same.

John Walley refers to an open letter by BusinessNZ, the Employers and Manufacturers Association, the Chambers of Commerce and others urging the Labour and Green parties to withdraw their electricity policy. "The letter reads to say that higher electricity prices would better serve New Zealand businesses' incentives to innovate. Would this really be the case?", asks the chief executive of the New Zealand Manufacturers and Exporters Association. "These are echoes of the comments made by the same group before the unbundling the local loop."

Walley points out we already have a single regulator that balances supply, demand and price and sums up saying: "It is about balancing the trade-offs between a tendency to support the expensive generators and pass windfalls to the lower cost generators, or introducing a system bias to ship the lowest cost watts available to the benefit of the wider economy."

Business editor Rob O'Neill repeats the argument. "It seems we have failed to learn lessons from previous flawed privatisations, especially that of Telecom," he says. "It took more than 20 years to finally establish a competitive market in telecommunications, years in which services were deliberately delayed, throttled and when prices were kept artificially high." To which you would have to add that no sooner have we finally established real competition in telecommunications than this government seems hell bent on undoing all the good work.

Other surprising voices of reason include Simon Mackenzie, chief executive of the regulated monopoly electricity and gas network owner, Vector, supports aspects of the plan such as a simplification of regulation for lines companies.

He said the central purchaser system proposed "would incentivise commercially rational investment in energy efficiency.

The normally logical Brian Gaynor says the Labour-Greens' proposal on the electricity industry has created "a major dilemma" for potential investors and has the potential to turn the Mighty River Power (MRP) float into "a big negative" as far as the NZX is concerned.

Yet in the same column he admits New Zealand's electricity market has never worked perfectly "because it hasn't achieved the appropriate mix between a monopoly structure and competition or between security of supply and pricing". Similarly Tim Hunter, who intends to buy MRP shares, also admits market failure. "Personally, I have long been convinced the electricity market is not properly competitive at wholesale or retail level and arguments trotted out to justify retail price hikes are often bogus." To which one surely has to ask, well, shouldn't we get the market right first?

It's not as though we haven't known about these problems for some time. In 2009 Professor of Economics at Stanford University Frank Wolak gave the Commerce Commission three lines of evidence to show that the four large suppliers in the New Zealand electricity market "have both the ability and incentive to exercise unilateral market power, and that this exercise of unilateral market power has resulted in substantial wealth transfers from consumers to producers during several sustained periods of time between January 1, 2001 to June 30, 2007".

Subsequent analysis by senior associate at the Institute for Governance and Policy Studies at Victoria University, Geoff Bertram, shows Wolak was right. Bertram tracks artificial asset revaluations by the generator-retailers totalling $2.4 billion over 1994-2004, which translates to an annual excess charge on electricity consumers of $312 million per year going forward. "In other words," says Bertram. "A permanent annual levy to reward the industry for successfully manipulating 'the regulator'."

Those asset revaluations totalled $12 billion as of June 2012 and are behind the 40% increase in the real average residential price for electricity since 2001, making New Zealand one the most expensive countries in the world for residential electricity. Just look at Figure 9 here.

The problem is depressingly familiar. We know we need proper regulation to ensure a well-ordered, efficient market, yet we continue to put faith in free market dogma that has been shown to be disastrous. Light-handed Regulation of Telecommunications - TheUnfortunate Experiment is just one of the many pieces of research that shows the bleeding obvious. In a small economy like New Zealand, if the deregulated telecommunication utility still owns the local loop, "it will continue to exercise monopoly power unless there is the political will and a properly funded regulator to curb its worst excesses."

Aspects of New Zealand's telecommunications regulation yet to be applied to the electricity sector include open access and real competition. When that's in place innovation and new investment opportunities flourish. The Labour-Greens' proposal for the electricity industry should be the start of a consumer-led revolution. Smart meters in every home so that consumers can really control how much power they use; and mandated feed-in tariffs so that consumers can become power generators through solar panels or other renewable means would be a good next step. That really would be an ambush.

This story has been changed from an earlier version, which referred to Vector chief executive Simon Mackenzie as supporting the Labour-Green policy. He has contacted the New Zealand Herald to point out that he is not a supporter of the policy, but supports aspects of the plan such as simplification of lines company regulation.