Keith Rankin's Thursday Column
Let the People Profit
15 June 2000
The Caygill Report on the electricity industry (released Tuesday) is a moderate and sensible attempt to make the best of a bad job that cannot be undone. Last year's Bradford-led electricity reforms were predicated on two false assumptions: that 'the consumer' is the only party that industry policy should advocate for, and that the creation of a competitive market would lead to lower power prices.
The Caygill Report emphasises the need to make sure that all the stakeholders have a say. The most abused stakeholders have been the public owners of the electricity generation, transmission and retailing assets.
The first thing that happened when ECNZ was partitioned was a loss of value of, I understand, over $300 million. In effect, every woman, man and child in New Zealand was, at the stroke of a pen, dispossessed of $100 of their personal wealth. The reason for this was that the total profits payable to the owners of ECNZ - you and me - were expected to be squeezed by lower output prices and higher costs. Assets are valued in proportion to the income they generate.
The monopoly profits accruing to ECNZ were properly called 'economic rents'. The Bradford reforms were about reducing the large rents that we received as owners, in return for small price gains as consumers. It was never a bargain that made sense. We were always better off keeping the rents as dividends and paying higher prices.
The lower prices never came. So we lost both as owners and as consumers. The best Caygill can offer us for the future is an industry self-management plan that ensures the rate of growth of electricity prices is slower than it would be under laissez-faire conditions. At least we will have arrested the problem which had its genesis in the public fire-sales of the late 1980s.
We never should have expected lower prices from the 1999 reforms. The simple economics of supply and demand indicated that there are two conflicting forces at work when viable companies are split into two or three new companies. Reduced monopoly profits are countered by higher costs, especially duplication of management. The likelihood was that the two forces would cancel each other out, leading to unchanged electricity prices on average. Some consumers would pay more, others less. The greatest danger was that - as is happening with the banks - fixed charges (which bear heavily on the poor) would increase, and variable charges (which most affect profligate users) would fall. Hence the Caygill Report recommends that charging should be regulated so that fixed charges are never more than 25% of any electricity bill.
The cat is out of the bag. The reforms cannot be reversed. But they can be redirected. Most of the key players remain in public ownership. In particular, as Caygill noted on National Radio [Kim Hill interview], we, as owners of local consumer trusts, still own the line companies that continue to make monopoly profits; that continue to accrue significant rents on behalf of their principals. In Auckland, the lines company is Vector (formerly Mercury Energy and before that the Auckland Electric Power Board), which is owned by Aucklanders through a holding company called AECT (Auckland Energy Consumers Trust).
We must not be seduced by the MEUG (Major Electricity Users Group) hawks who want heavy-handed regulation to achieve their goal of low electricity prices. Instead we should start to demand that high prices be offset by dividend payouts from our consumer trusts.
Every household in Auckland is owed something like $400 at present, money paid to the AECT by Vector for distribution as dividends. For ordinary households, receiving these profits as a cash income more than makes up for small increases in the cost of electricity. The problem is that we have no history of being assertive with respect to our public property rights and to the revenue arising from public property. When the Business Roundtable was actively advocating for private property rights, public property was being plundered with barely a whimper of response. (The story of Bruce Jesson and the Alliance's management of the former Auckland Regional Services Trust is of course the most notable exception. Mention should also be made of Pam Corkery and her contribution to keeping the Ports of Auckland in public ownership.)
At present the Vector money owed to Aucklanders is tied up in an ongoing court case between Auckland's city councils (owned by the people of Auckland) and the AECT (owned by the people of Auckland). Aucklanders are paying for the privilege of having Vector's revenue disappear either into the pockets of lawyers (all of whom claim to be acting for the Auckland public) or the councils which have no intention of distributing any money they get to Aucklanders.
Auckland City Council, for example, has two other uses for any funds it can get its hands on. First, the Council is under pressure to keep rates low. If rates are kept lower than they would otherwise be on account of Vector revenue being transferred to the Council, the Vector beneficiaries will be, in the main, the richest of Auckland's ratepayers. By contrast, a direct dividend payout to Auckland residents would be a significant boost to Aucklanders on low incomes. There are huge equity issues involved in the way we manage the revenues deriving from publicly owned assets.
Second, the Council has just negotiated to purchase the long-neglected suburban rail corridors from Tranz Rail for $65 million. (The deal is a daft waste of money, an example of laissez-faire purity - pursued by a left-wing council - as silly as the Bradford electricity reforms were. Auckland could have had a rail network like Wellington's. But that's another story.)
The Auckland councils do not want to fund the $65 million agreed price from rates. They're casting around for someone else to pay Tranz Rail. The government (who sold the asset to Tranz Rail for a peppercorn $1 per annum rent in 1993) says "no", because they were not a party to the purchase. My guess is that, in the end, moneys the councils extract from the AECT (ie by denying Auckland residents their electricity dividends) will neatly offset their liability to Tranz Rail.
What should happen? The monopoly lines companies, such as Vector, should be left under light regulation, more or less as the Caygill Report suggests. Their non-retained profits should be distributed as directly and as promptly as possible to their public owners. Likewise, the profits from nationally owned generation and retail companies should be paid directly to their public owners. Monopolies are good for the public when the public owns them. What consumers - especially low income consumers - lose through monopoly pricing they can more than gain through their dividends as owners.
Monopolies are often more efficient than contrived alternatives. Natural monopolies provide commodities (such as electricity) or services (such as urban transport) at lower cost than rival companies with duplicate management structures, computer systems etc. In addition, in the case of energy, there are significant third party costs arising from energy use which are reduced when prices to consumers are high. (The Caygill Report placed some emphasis on the need for conservation incentives.) High energy prices lead to both conservation and innovation. We can benefit hugely - directly through public dividends and indirectly through conservation and new knowledge - by charging monopoly prices for the use of the electricity we supply to ourselves.
High prices offset by dividends is a much more equitable system than is the lower price zero dividend regime that is the best possible scenario arising from privatisation and competition (or privatisation and regulation). A person who uses very little electricity would receive the same dividend as persons who are profligate energy users. Indeed many careful consumers could expect to make more in electricity dividends than they spend on electricity.
I would prefer to see electricity dividends paid to the consuming public on a per capita basis rather than, as the former Mercury Energy used to, on a per household account basis. Family poverty in Auckland could be significantly relieved if Vector's profits were paid out, without delay, to every individual Aucklander. A family of six would receive six dividends.
A model worth looking at that links public property rights to energy resource ownership is the Alaska Permanent Fund. The APF pays dividends in the order of NZ$4,000 to every child, woman and man resident in Alaska. This is the direction we should be exploring, rather than harping on about the need for tough regulatory measures to guarantee low energy prices.
Too many New Zealanders live in poverty while getting no return for assets that they own; assets which contribute massively to New Zealand's gross domestic product. Deprivation is caused by low incomes, not high prices.
© 2000 Keith Rankin
Thursday Column Archive (2000): http://pl.net/~keithr/thursday2000.html