[OPE] Electricity problems

From: Jurriaan Bendien <adsl675281@tiscali.nl>
Date: Tue Oct 28 2008 - 17:47:59 EDT


What happened in New Zealand was that they decided to privatise electricity supply because supposedly competition would make things more efficient. At first you had two, three dozen companies, then they bought each other up, and then they were bought out by foreign owners. It wasn't really about producing new wealth, better organisation or better services, but a bit of good old plunder of already existing assets. I am not opposed on principle to all privatisation - there may be some cases where it is practically the best option - but this was a particularly badly thought-out case of it. As far as I know, power prices in New Zealand are still rising, on average at a rate above the rate of price inflation. Contact Energy is just now raising prices by 11 - 12% and Mercury Energy 2.5 - 5.7%, with corporate management often levering hefty pay rises.

If interested, here's a 2003 PEN-L post I wrote about it (a little out of date now):

In 1990, the Labour Government inaugured the abolition of the system of
state power boards, providing for corporations led by professional company
directors, CEO's, employers etc. Lavish, all-expenses paid conferences and
trips were provided for these people, for consultants etc. Corporatisation
effectively began in 1992.

Power prices went up on average about 23.5 percent between 1990-1995. The
price power companies paid during the same time went up just 3.7 percent.
The vast majority of the population was against the sale of the state
assets, but the government did it anyway.

Deregulation via state corporations and privatisation led to huge
differences in charges to consumers - one year, Asburton households faced
annual charges of $555 just to be connected to the power supply, while in
Christchurch just down the road, charges were $109. In 1993/94, King Country
power charges nearly doubled.

In 1992-93, NZ experienced the worst drought in 100 years, causing supply
problems. But Electricorp executives had aimed at realising a $400 million
profit in 1992 by selling more power; having reached their target, they paid
themselves about $600,000 in bonuses. Planning for adequate capacity wasn't
really well-considered in the corporate plan.

In 1998, Auckland experienced blackouts for 6 weeks when 4 power cables in
the CBD crashed. The cables were 40 years old, and needed replacement or
maintenance, but profit margins were more important to Mercury Energy:
between 1993 and 1997, profits went from $21.8 million to $82 million
annually. Executive salaries were lucrative: CEO Wayne Gilbert earnt close
to half a million dollars a year. At the same time, while in 1992 Mercury
Energy employed 1141 people, by 1998 half the workforce had been laid off,
including experienced cable fitters. Thus, when the Auckland cables crashed,
the company had to get skilled staff out from Australia, because they
couldn't actually do the repair job themselves. The total cost of the power
crisis to Auckland was estimated at $1 billion.

A commision of inquiry comprising some captains of industry was set up, but
it was largely a whitewash. (The Electricity Industry Reform Act 1998 did
however force the separation of generation, retail supply networks, and
power retail sales. Thus, companies were prohibited from owning an
electricity supply network (lines) operation as well as either a power
retailing or generation operation, and had to divest from part of their

In the winter of 2001, drought hit again and lake levels dropped alarmingly
low. Blackouts were prevented only through extra generation of the Huntly
station, at great expense. (Genesis, the owner of Huntly, isn't intending to
stockpile coal this year, because it is trying to do a deal with Solid
Energy (likewise a semi-private state-owned coal corporation), both are
hedging for maximum profits).

In 1999, the Labour Government set up an inquiry to look into the
electricity industry, appointing former Labour MP David Caygill to lead it
(I personally campaigned against Caygill in 1987 with the NZ Socialist
Alliance group). Caygill was paid $1500 per day for this, and the result was
a report that cost $7 million, which just recommended market policies and
selfregulation by the corporations. Talking about electricity is a highly
lucrative business, as you can see.

Bill Rosenberg, an occasional PEN-L contributor, shows another aspect of the
story in an interesting paper ("The Privatisation of New Zealand's
Electricity Services", available online): whereas corporatisation and
privatisation occurred to provide for competition that would lower prices (a
fraudulent lie), the reality is that the privatised companies first start
buying each other up, and then are bought out by Canadian, Australian and
American interests.

Rosenberg says, "By the end of 1998, TransAlta had 530,000 customers, or
about one third of the market. ECNZ had 470,000 and Contact Energy 430,000.
Trustpower was some way behind with 114,000, but has since built that up to
218,000. "Virtually all New Zealand's approximately 1.9 million electricity
and natural gas consumers are being supplied from seven companies as opposed
to 39 at the start of the year" wrote Dow Jones Newswires at the end of

According to Rosenberg, "Contact Energy, controlled in the U.S.A.,
TransAlta, owned in Canada, and Trustpower - which is currently undergoing
competing takeovers by Australian Gas Light of Australia, and Alliant of the
U.S.A. - now generate over 40% of the country's electricity. Transmission is
still state owned, but about 30% of the supply network is owned by UtiliCorp
of the U.S.A. TransAlta, Contact Energy and Trustpower between them have
almost two thirds of the electricity retail market."

So, from the original argument that privatisation and competition would
create more efficiency and reduce costs, the public has been fleeced on a
huge scale, namely:

- taxpayer's public assets thieved and corporatised at the taxpayer's
expense, providing rich pickings for the elite
- luxurious salaries for executives, directors, consultants, advisors and
other acolytes
- sharply increased costs to ordinary consumers (and to some extent business
as well !)
- private monopoly corporations substitute for state ownership, which are
oriented to maximising profits to shareholders and not to reducing costs,
ensuring maintenance and sufficient reserve capacity
- the New Zealand monopolists are bought out by foreign interests, such that
a good portion of the revenue is not even invested in New Zealand, but
siphoned off by foreign owners.

The whole argument for corporatisation was ridiculous and a swindle, because
how can you have competition in a nationally designed and constructed
power-grid anyway ? The consumer cannot choose to buy power from specific
generating plants, and can only choose which power company to pay for the
power, and even here, there is almost zero "consumer sovereignity" (the term
used in neoclassical economics). The difference in charges among different
companies are pretty minimal. The other aspect is, that the polity was
rather clueless about how privatisation would actually occur, and how you
would legally ensure a good system. In other words, they did not even know
how to privatise in practice, it was just a "creative policy idea" that
enriched the rich a bit more. The end result of that, is that New Zealanders
just lose income to overseas owners, while the cost of living goes up and
there are less guarantees against black-outs in the future.

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Received on Tue Oct 28 17:56:52 2008

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