Friday, 1 July 2011

A Vote for Asset Sales is a Vote for Higher Power Prices

The Electricity Authority is currently running a campaign on TV called “What’s My Number”, to encourage people to check out how their power company stacks up against the other power companies. I looked at the website and where you can see how much you could save by switching power companies.
I found graphs showing what the various power companies have been charging in different parts of the country over the last few years, and some of the latest price rises are huge.
It looked to me as though the Government-owned companies like Genesis and Meridian often charge less than the larger private companies. I wondered if this applied in the Wairarapa, so I got local power prices from the Ministry of Economic Development’s website and put the data in the following chart;

To make the chart simpler I have left out some of the smaller companies, but the chart still covers over 90% of the local electricity market. All of the companies have increased prices substantially, and more increases are expected as demand grows and we move towards more environmentally friendly sources of power. (Note that the chart shows what it would cost to use 8000 kWh of electricity in a year, including line charges, GST and prompt payment discounts but not other discounts or rebates).
The pattern I have spotted of the Government-owned retailers charging less than the large private companies, seems to happen all over the country. In fact, it looks as though the two companies which have the highest prices are also the ones which are listed on the share market, i.e. Contact and Trustpower. A sharemarket listing is what is planned for Genesis, Meridian and Mighty River Power (the state owned power companies the government wants to start selling off).
I have talked about the risks around the Government’s asset sales strategy before, and how the major debt problem is private NOT government debt, but you probably thought, “Oh well the economy’s in the s#it, we’ve got too much debt and have to pay for the Christchurch earthquakes, so it‘s fair enough for the Government to sell down some of its assets”. This is odd because, selling state assets won’t reduce private debt.
What is also not realized is what if a vote for asset sales is a vote for higher power prices?
As far as I can tell, the private companies appear to have more aggressive pricing strategies than the Government owned retailers, and in a commercial world, it makes sense. They can hike prices & risk losing a few customers, because the extra profit from raising prices across their whole customer base is so big that it offsets the losses.
The Government has assured us that the State Owned Enterprises (SOE’s) being sold down will benefit from being run more commercially. Presumably this means that their new, more commercial Boards of Directors will seek to maximize the return from these businesses. In fact their new shareholders will demand it.
My worry is that this process will inevitably lead to higher power prices as this is the easiest way to boost returns. The “Mum & Dad” investors National hopes will buy some of the shares might benefit, but the rest of us will get it in the neck.
In my book the price charts show us that by owning the power companies, the Government has actually been keeping a lid on the cost of electricity for all of us, the same way Kiwibank has been keeping the Aussie banks honest. I reckon running these companies “more commercially” won’t be in our best interest long term.
Please folks, think carefully before you give National the go ahead on asset sales. Not only will you be voting to sell what you already own for no effect on private debt, it will cost you a lot more in your back pocket in the long run.
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