Keith Rankin: Vector Vexation
Keith Rankin, 21 December 2000
In 1999, Vector, formerly Mercury Energy and before that the Auckland Electric Power Board, paid a dividend of $107m to its owner, the Auckland Energy Consumers Trust (AECT) (see press release on Scoop). The raison d'être of the AECT is to distribute that dividend. In May 2000, it paid another $75.4m, adding up (apparently) to $157.6m plus interest!?
None of this money has yet been distributed to the people of Auckland, Manukau and Papakura on whose behalf the AECT acts. We hoped that the recent election of three Powerlynk candidates (out of 5) to the AECT would enable cheques of $650 per household to be sent before Christmas 2000. This was a Christmas present Aucklanders wanted and, in many cases, desperately needed.
With a bit of luck, we might just get some money by the end of January. But the dividends to households may be only $350, half of what Powerlynk promised. The AECT Citizens and Ratepayers minority is fighting hard for the principle that businesses should receive the other half of the payout, and that dividend's to businesses should be weighted according to the amount of electricity they use.
So what's going on?
The core problem is that we appear to have no adequate theoretical principles or legal definitions of public property rights. Economists are no use. Many economics texts (and ACT MPs) wax lyrical about private property rights, but have nothing to say about public property rights.
Politicians appear to be of no use. Labourist politicians distrust any talk of "property rights", while capitalist politicians are reluctant to concede that property rights can be anything other than private.
In the absence of any suitable principles of public ownership, publicly owned trusts (such as the AECT) are set up on an ad hoc basis, and disputes arising can become intractable. The judicial system appears to have no idea about how to resolve such issues.
I believe that the best way to approach the matter is to understand that there are two kinds of public property right. One right refers to assets in the public domain; property such as the environment that is indivisible and cannot be anything other than public. The second right relates to publicly-owned enterprises which in theory could be privately owned. So the two kinds of property right are inclusive and exclusive. In the Auckland electricity dispute, we are dealing with an exclusive property right. Vector's owner is as clearly defined as is that of any private business. Vector is like any other capitalist company that makes a profit and pays a dividend. So the issues should be resolvable.
The intractable issues relate to the ownership of the holding trust, the AECT. One issue arises from the separation of the capital interest from the income interest in the AECT's deed. A subtext here is the interests of the generations of Aucklanders alive today against the interest of generations living after 2080. Another relates to the assumption that public ownership means consumer ownership, precedents for which exist in mutual societies but not in the capitalist private sector. A third issue, not part of the present dispute, relates to whether dividends should be paid on a 'per customer' or a 'per capita' basis.
When the AECT was set up, the Auckland, Manukau and Papakura City Councils were named as the "capital interest", while the electricity consumers of these parts of greater Auckland are classed as the "income interest". No private company that I know of has two sets of owners, let alone two ownership interests who themselves represent the same people. In this case the people of Auckland, though set against themselves, are without doubt the owners of all of the owners.
In October 1999, the councils (representing the capital interest) sought and gained an injunction to prevent the Vector dividend from being distributed to the people of Auckland. The councils wanted legal clarification as to how much of the dividend paid by Vector to the AECT was in fact the proceeds of asset sales. The issue of defining the capital component of the dividend was clouded by the company's restructuring (when Mercury became Vector) made necessary by the failed Bradford electricity reforms. While the dispute was originally just between the councils and the AECT, Vector also got involved, insisting that it, as a commercial company, should not have to divulge the confidential information required before anyone could determine if part of the dividend was in fact capital.
What the councils appear to have actually wanted was for the AECT to manage the capital component of the Vector dividend as a separate fund which would, on maturity in 2080, be paid to the councils. It's hard to see why the councils fought this issue so passionately, given that it will be 80 years before they get the money. I can only assume that the councils are made up of left-wing middle class committee people who, like most pale pink middle class committee people, seem to fear the prospect of cash getting into the hands of the lower classes. (Such people would rather spend - or save - money on behalf of poor people rather than pay it to them.) Also, I expect that the councils would like to use that fund as collateral for raising loans for other projects; eg railway development. In 2080 the handover of the fund to the councils could be used to settle any such debts.
I believe that the court case was an attempt by the councils to grab a share of a profit fund that looked too inviting to pass over. An alternative would have been to raise rates. If so, then the net effect of the councils getting what they wanted would be a wealth transfer from the poor (who should be getting a substantial share of the Vector dividend) to the rich (who would have to pay the bulk of any increase in rates); from the people of Otara and Glen Innes to the people of Remuera and Howick.
While that dispute appears to have been resolved sufficiently to allow the payout to go ahead, a new dispute within the AECT has caused further delays. Two Powerlynk trustees were being courted by the minority trustees (see Tuesday's Herald), who believe that only half of the dividend should be paid to households, with the other half going to firms.
So far, no principles have been clarified. Further, the issues seem to be too pointy- headed to be debated by Aucklanders. It appears to any observer that Aucklanders don't care, despite the fact that the loss of $300 per household is the equivalent of an arbitrary poll tax.
What is needed is a clear separation of the concepts of "owner" from "consumer". Owners should get equal shares of the profits regardless of how much electricity they use. Firms should not be considered to be part-owners, directly or indirectly, of the AECT. Further, if dividends are to be paid to businesses, those who happen to consume more electricity should not be subsidised from a fund owned by the people of Auckland.
It would help if it was clear in law and in principle, that each resident or household of Auckland, Manukau and Papakura, through the AECT, owns an equal share of Vector. And that no other party has rights to siphon off profits held for distribution by the AECT. The dividends, each year, could be distributed, promptly and in full. A payment of $650 per household this January will, if it happens, make a huge contribution to the closing of the gaps in Auckland.
That leaves one issue unresolved. Why should a household made up of an extended family receive no more than a person living alone? Why not pay out the Vector dividends on a strict per person basis rather than on a per household basis. Alaska can do it. Why not us?
We could really close the gaps if we paid individual dividends from publicly owned trusts like the AECT (including the former Auckland Regional Services Trust), and from LATEs (eg Auckland's Metrowater) and SOEs (eg New Zealand Post).
The only snag is that if the dividends, despite the imputation credit system, are classed as taxable income. Those poor people caught in poverty traps (who incur effective marginal tax rates well in excess of 50 cents in the dollar) would in effect pay much of their dividends to the national government as benefit clawbacks. Many of New Zealand's poorest people live in Auckland's 'Vector zone'. Among them are state house tenants receiving the new subsidy who will in some cases be paying effective secondary tax rates of over 100%. In that case a Christmas present of $650 would actually make them worse off.
My solution is this. Vector, through the AECT, should be deemed to be owned equally by each individual resident of Auckland, Manukau and Papakura. There would be no separate capital interest. Businesses would hold no equity in Vector. Just as if Vector were a private company, dividends would be paid equally to each equity holder.
My solution is a kind of people's capitalism; a much better kind of people's capitalism than that which requires us to sell public assets to ourselves (a process usually called 'privatisation') before we can collect a dividend.
(c) 2000 Keith Rankin: firstname.lastname@example.org
Thursday column archive: http://pl.net/~keithr/thurs day2 000.html