Electric Blues: Tell Us Again – Why Are We Privatising Our Energy Generators?

HERE’S AN IDEA. Let’s take a commodity we all need – electricity, for example – and try to make it as cheap as possible. How would we do that?

The capitalist would say: “Create a market. Set it up so anyone can become a supplier. Regulate it (gently) to ensure genuine competition between suppliers. And, Bob’s your uncle! Lowest possible prices. Mission accomplished.

That’s what everyone, from Roger Douglas to Max Bradford to Pete Hodgson to Bill English has been telling us for the past thirty years. And that’s pretty much what we’ve got.

But does it work?

Well, the CEO of Contact Energy, Dennis Barnes, doesn’t think so.

According to Mr Barnes, before private investors put any more capital into Contact Energy they’ll need to be sure of an adequate return on their investment – in plain English: they’ll need to see higher profits. Accordingly, the price paid by electricity consumers (that’s you and me) will have to rise.

Under our capitalist’s economic model, Mr Barnes has just announced that he intends to make his company uncompetitive. Contact Energy’s electricity will soon cost more than the electricity supplied by rival energy companies.

What happens next? If the capitalist’s model is working properly, all the other energy suppliers will immediately inform Contact’s customers that they need not pay more for their electricity. The race will be on between Mighty River Power, Meridian Energy and Genesis to see which one of them can lure away the most Contact customers – by offering a lower price.

Well, if you expected that to happen, you’d be wrong. Because, as the Green Party’s co-leader, Russel Norman, says in his media statement of 2/4/13:

“Contact’s competitors conspicuously failed to disagree with Contact’s push for higher electricity prices.”

How are we to account for this lack of competitive responsiveness? Mr Norman explains it like this:

“Mr Barnes is right; private investors need larger profits than the government to make a return on investment because their cost of capital is higher. And higher profits mean higher power prices.”

Well, if that’s true, wouldn’t it make more sense for the government to acquire the capital necessary to construct enough power generation facilities to supply cheap electricity to all New Zealanders?

I mean, if the state can raise the money – either by means of its progressive taxation system, or by borrowing the money at a discount from the private sector – to build such a system, why doesn’t it do exactly that?

A single, state-owned, nationwide provider of electricity would be much easier to manage and considerably more efficient than the present system of multiple suppliers.

States are much better placed to absorb the cost of repaying borrowed capital than private shareholders. Human-beings are mortal creatures, they want a return on their investment now – not in fifty or a hundred years’ time. States, on the other hand, are immortal – they can afford to wait.

States also have less incentive to be greedy. If the objective is to supply its citizens with cheap and reliable power, then the state’s only considerations when setting the price of electricity are to meet the cost of its generation and set aside sufficient capital to match rising energy demand with increased energy supply.

Mr Norman had something to say about that demand and supply equation:

“The excuse that capital is needed to fund new power stations doesn’t stack up. A raft of new generation projects have been cancelled or suspended in the last few years due to static demand. The risk that Tiwai Point will close means more likelihood of a surplus of generation capacity than a shortage.”

So, let’s return to our original question: How should we go about making electricity as cheap as possible to the consumer?

It would appear that the capitalist’s market-driven solution is not the best way to proceed at all. Indeed, the need to guarantee a profit to private investors is, as Mr Norman points out, practically guaranteed to make electricity more expensive – not less.

Placing energy generation in the hands of the state: giving it the responsibility for the design and construction of energy generation; asking it to build and maintain a national electricity transmission grid; and entrusting it with both the capital-raising and price-setting aspects of the industry; that would seem to be the best way to guarantee cheap energy to consumers.

What’s that you say? That is precisely the system New Zealand once had? And it supplied us for decades with some of the cheapest electricity in the world? And that all the corporatisation and marketization of our electricity industry has achieved, since it began in 1984, is to raise the price of power to the point where many New Zealanders can no longer afford to adequately heat and light their homes?

If that’s true, then wouldn’t it make more sense to return the control of New Zealand’s electricity generation and transmission facilities to a single state provider? And instruct it to keep the price as low as possible? Any fears about keeping so large and important a monopoly honest and transparent could be allayed by making it fully and publicly accountable to our elected representatives.

But, if re-nationalising New Zealand’s energy sector would make electricity less expensive, and its generators more accountable, could someone please explain again – why are we privatising it?