Wednesday, January 26, 2011

Government may privatize electricity

From Kiwiblog

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

 Mighty River = Mercury,
Solid Energy is a coal producer.  

Essentially the National government is saying it may (will) privatize the electricity industry.  The notable exception is Trustpower, and we'll probably talk about that later.  

The reasons given seem to be:
1) We think the company will be better run.  
2) It will free up capital for the government.  

Point 2 is outside the realm of this blog and is political.  

However the first point is mentioned as follows

 that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

John Key used Air NZ as the example of why this method will work.  The questions is will this happen?  We think that the comparison with Air NZ is not the best analogy.  Air NZ has real competition, Quantas, cruise ships, Air Chile, etc.  
To make the Air NZ analogy it's like having a law in New Zealand that all airliners flying in and out of Auckland Airport have to use Air NZ planes.  

In New Zealand all electricity companies have to use the area lines companies and Trustpower.  So opening up the retail market may just be short sighted.  We've mentioned the role of lines companies in price rises before.  So opening up the Power Companies to individual ownership may not change this at all and the lines companies may stay the same keeping prices rising.

Also true competition only exists when there are alternative suppliers supplying identical products, but also when there are alternative suppliers supplying alternative products.  For domestic travel you can fly Air NZ, fly Quantas, drive, rent a car, take a bus, etc, etc.  
If you want your computer to run you need electricity.  You really only have a handle of options all of which involve a traditional electricity company.  

For this reason we feel there is a much greater risk of the Power Companies just continuing with business as normal. To recap this is for two reasons
1) The same dependence on lines companies and Trustpower.
2)  The lack of real alternatives. 
A better analogy would be telecom.  It has been twenty years since telecom was privatized.  Real competition has only just started.  The service you get from telecom is universally condemned and the company itself is open to vilification.

The reasons are the same, all of the competition had to depend on the telecom lines (at least at first) and if you wanted to talk with other people for years there were no other options.  (Now there are mobile phones, landlines, and skype).  

We will of course be watching closely to see what happens.

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