Electricity policy - Labour just changed the conversation

Electricity policy - Labour just changed the conversation

Comment by Pattrick Smellie

April 19 (BusinessDesk) - For those close to the development of today's electricity market over the last 25 years or so, the Labour and Green party announcements on a return to central planning have landed like a bomb.

For many, it's a question of whether the world just changed.

For the Treasury and for MightyRiverPower, and the government as shareholder, the question is whether what Labour and the Greens just announced qualifies as a "significant adverse event", as defined in the MRP share offer document, and requiring that the offer document be updated.

If it is judged to be so, then that is an admission that the political balance just tipped strongly in the Labour-Greens' favour.

Yet the new policy stabs at the heart of the edifice on which the government's partial privatisation agenda is built.

Moreover the polls remain very close, the government is in the poop over privatisation and the spy agency stuff-ups, and it was counting on the MRP float to be a success. There could yet be a change of government next year.

Instead, Labour's emerging policy driver David Parker has fashioned either a brilliant new policy or a cynically calculated political move to pole-axe the asset sale which commits Labour to a populist winner of a new policy that will damned difficult to implement. The truth may well be both.

In essence, the Labour-Greens policy legitimises New Zealand deciding to make its hydro-electricity dominance a source of competitive advantage. But the devil's in the details. It throws out the electricity industry orthodoxy since corporatisation in the late 1980's that says security of supply is vital, and that competition to provide the next cheapest unit of supply is the best way to decide what to build next.

The Labour-Greens policy agrees security of supply is vital, but also thinks the market model has produced much higher than necessary prices and excessive profits to power companies. If people vote Labour-Green, they will be voting to strip probably billions of dollars of capital value - i.e, savings - off the balance sheets of New Zealand power companies.

Labour and the Greens see this as providing a dividend via politics to households and energy-intensive businesses, especially in regional economies.

As precedents for behaving this way and living to tell the tale, Labour has its punishment of Telecom in the mid-2000's under David Cunliffe as Telecommunications Minister, and similar value destruction at Auckland International Airport in pursuit of consumer gain.

In other words, whether you hate or love their electricity policy, Labour has achieved several useful objectives this week.

First, it's demonstrated unity with, but leadership of, the Greens. They look more like a credible government in waiting than they did a week ago.

Secondly, they've sabotaged the politically unpopular MRP float and poisioned it for a lot of retail and institutional investors, who just decided not to buy. A week ago, when fears about the Tiwai Point smelter contract renewal were the issue, a lower issue price looked like a reason to buy MRP shares with your ears pinned back. Now, it's not so clear.

Thirdly, and crucially, Labour has changed the conversation. Oppositions crave that attention. Policy still matters, and Parker has been here before. He changed the conversation just before the last election with Labour's capital gains tax advocacy.

That was too late in the campaign. It scared people. Since then, however, a capital gains tax has become almost uncontroversial as inevitable policy when next a Labour-led government is elected.

Could it be that Parker hopes to achieve the same with this policy, released well in advance of an election and therefore better timed?

Sure, it will wipe billions off the Crown balance sheet in both asset writedowns and lost dividends, since state-owned power generators won't be required to earn a profit. That is an irony given Labour's argument against selling half of MRP is that it would rob taxpayers of income. But taxpayers tend not to notice value lost through accounting changes.

And sure, investors will see value wiped off their shares. But not many of them vote Labour or Green and, in the case of Contact Energy's majority shareholder Origin Energy, they're Australian. Their electoral mileage for the Opposition is minimal. KiwiSaver savers might mind, but their political power has yet to be harnessed.

Finally, the Labour and Green parties have, with their electricity policy, not only identified a bellwether issue, but they've rung the bell vigorously.

Power companies are deeply unpopular, but after the best part of a generation, kiwis were starting to think the current electricity market was just the way of things. Labour has just shown them a rabbit they like the look of and reminded them that governments are powerful.

Many voters will like that and would only peripherally feel the impact of a cooling towards New Zealand by both foreign and investors, the slower economic growth, the loss of innovation and dynamism in the competitive parts of the electricity market today, and the dead hand and additional cost of a central buyer which probably won't see dry winters coming.

That makes the Opposition's announcements this week politically powerful. If the world didn't just change for the electricity sector, then at the very least the ground just shifted.

(BusinessDesk)

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