By Bernard Doyle*
The Labour/Greens announcement on electricity sector reform concerns us on two fronts.
Firstly, the move to a state buyer of power risks being a retrograde step for the New Zealand economy.
Secondly, we believe it will prove damaging for New Zealand capital markets, and comes at an unfortunate time given the significant progress made here since 2010. We detail these two concerns below:
Government intervention in production usually doesn’t work
The first blush of the NZ Power policy is another variation of models that have been tried, tested and failed for well over a century. That is, the state looks askance at the messy process of market-discovered price and production and figures it can do a better job.
Labour says as much in its policy document stating; “No one plans the New Zealand energy sector and ensures it operates for the benefit of all New Zealanders”.
The idea of a central planner co-ordinating supply and prices is superficially alluring. But almost invariably it ends in either taxpayer funded over-supply or rationing.
A brief look at New Zealand’s own history in the energy sector provides ample evidence, with the Think Big projects of the 1970’s an example of well-meaning but ultimately financially crippling supply-side state intervention.
The Clyde Dam was built on price assumptions that are still distant 30 years later.
It is illuminating that Labour cites California, Virginia, South Africa and Brazil as poster children for the centrally planned electricity model.
A quick scan of media headlines in three out of the four markets from the last quarter alone shows significant supply problems:
“California Girds for Electricity Woes”, Wall St Journal February 2013
“Biggest Crisis Since 2008 Looms for South African Mines: Energy”, Bloomberg March 2013
“Fears grow of Brazil power shortages”, Financial Times January 2013
The Californian example highlights just one of the many ways a central planner can come unstuck:
Changes in California's market have attracted lots of new generation; the state expects to have 44% more generating capacity than it needs next year. Grid officials say they expect the surplus to fall to 20% by 2022, though it will remain high for about a decade. However, the surplus generating capacity doesn't guarantee steady power flow.
Even though California has a lot of plants, it doesn't have the right mix:. Many of the solar and wind sources added in recent years have actually made the system more fragile, because they provide power intermittently.”
The electricity market is extraordinarily complex – the notion that a central planner can sit, Wizard of Oz-like, making long term planning, production and price decisions more efficiently than thousands of minds working in a market process is hopeful.
Of course there is a role for the Government in the economy, including the electricity sector. It is as a regulator, not a player.
None of this is to say that the current system, which sets prices at the marginal cost of the most expensive generation, is perfect.
Whilst likely more efficient, there is a trade-off that electricity consumers bear versus an average price model. So a discussion on New Zealand’s electricity market is a worthwhile exercise.
However, 1. New Zealand has had this debate before and found strongly in favour of the market model, and 2. We believe there should always be a strong bias toward the status quo given the increased risk and detrimental impact on investor sentiment that constantly changing regulatory regimes engender and for which NZ already has a poor reputation.
This policy will hurt NZ capital markets
Labour built credibility in the 2000’s with its efforts to rejuvenate New Zealand’s capital markets, culminating in the Cullen fund and KiwiSaver. Of the two, KiwiSaver has proven to have a profoundly positive impact on New Zealand capital markets.
New Zealanders have ~$1.5bn invested in the local equity market via this scheme. More importantly, the scheme is an illustration of how financial markets work in either a virtuous or vicious circle.
KiwiSaver is an example of a virtuous circle, with fund inflows encouraging new floats such as Trade Me, and encouraging broader investor interest in the local equity market. This will in turn help future promising businesses raise capital via local investors rather than selling directly to offshore trade buyers.
We believe the latest policy, as announced, will be an example of a vicious circle. Share prices in the electricity companies are already falling – which directly impacts New Zealanders savings via KiwiSaver.
More importantly, it sends a worrying signal about the intentions of a Labour/Greens Government.
The backbone of the New Zealand stock exchange is made up of companies that have regulatory exposure: Auckland Airport, Sky Television, Fletcher Building among them. The message from Labour/Greens to investors is that they will be giving little credence to the impact on corporate profitability in future regulatory decisions.
While this may garner populist support, the flow on effect will be for investors to shun these assets, prices to fall and interest in the equity market to wane.
This may sound extreme, but it is important to remember that investors in shares already bear considerable uncertainty just by being in the market.
A further layer of risk from state intervention will be a bridge too far for many.
JBWere is a case in point, as a Private Wealth advisor with ~$1bn of client funds invested directly in the New Zealand sharemarket. Support of the local market is important to us and our clients, but we can, and do, invest significant sums outside of this country.
The steps the Labour/Greens are suggesting, if enacted, are significant enough for JBWere to consider a reduced allocation to the local sharemarket.
We doubt we would be alone in making this judgement.
Governments have learned through history that every action has a reaction. It is often the case that the reaction is unintended, unanticipated and unwelcome.
We suspect the reaction of the local capital market would prove another example under these policy proposals.
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Bernard Doyle heads the investment strategy group at JBWere in New Zealand.
107 Comments
This guy doesn't convince me either way. I only end up with a belief that the models are wrong somehow. A surplus supply of power would suggest a capacity to grow for the society it supplies, as well as ensuring an affordable price. There is not enough competition in NZ to deliver the promised savings so a central or consolidated producer/buyer/supplier could well work if the rules directed the appropriate actions (affordability, infrastructure maintenance/replacement/development. NOT profit).
Capital markets????? Who cares? Since when did capital markets produce anything? They are just a money go round.
C' mon Murray the idea that the tiny NZ Government is somehow able to manage the costs of every aspect of our lives , the market , demand , supply , and efficient distribution of every commodity , product or service is unrealisitc.
If you believe Labour can give us lower prices for electricity , than why cant they do it for MILK or Petrol and Diesel , Bread , Rice , or general foodstuffs , vehicle tyres or dental costs or eye surgery all of which are available for less money in India , South East Asia , and even South Africa.
And dont cite Pharmac as an exapmple of where this works because the circumstances are not remotely the same as our domestic electricity generation setup.
why cant they do it for MILK or Petrol and Diesel , Bread , Rice , or general foodstuffs , vehicle tyres or dental costs or eye surgery all of which are available for less money in India , South East Asia , and even South Africa.
Could you explain why the "market" doesn't seem to be able to do this either?
Good Question , I also dont understand why fresh milk in India is NZ$ 60 CENTS A LITRE when its over NZ $1,20, in NZ and India imports milk products from everywhere including NZ
Or why a frozen chicken in India is 1/3 rd the price in NZ because Tegel has secured tarriff protection
Or why NZ fresh fish is 200 times more expensive than fresh fish in Malaysia , OR why we dont have small scale fishermen who sell fish at the wharf like most other countries .
A lack of real competition , or possibly its the small market , protectionism and First- World price maximisation , OR just plain price gouging .
Easy Boatman, power is NOT exported. Diary products are, and get NZ huge quatities of export revenue, and are thereby the Governments darling. They cannot control the price of most commodities because many components that are incorporated into them are from external sources.
Dental costs are too high, that is why many dentists have priced themselves off the market. I personally know quite a number of people who have got significant dental work done to a high standard in Thailand at about half, or less than the cost of getting it done here, including travel! Everybody wants to get rich yesterday. Perhaps they should look at the example set by Stephen Tindal.
No power is a unique driver, and it could be a component in supporting many industries. Plus we need to remember that as we are a low wage economy, more and more people are struggling to afford it!
The bit that I really struggle to accept though, is the trick of companies to revalue their assets every year and then use that revaluation to justify price hikes with no real increase in costs. Successive Governments have over-milked that cow, but it is the ordinary Kiwi who've paid for it. I'd like to see a bottom line costing in detail on how much it costs each power station to produce a kilowatt in energy, not the smoke mirrors examples that exist today.
Bernard is right on the money with this , it actually goes deeper because it shows how Labour and the communists masquerading as Greens are quite cluesless as to how to run a modern sophisticated free market economy.
The unintended consquences of their utter stupidity are an immediate drop in investor confidence and a fall in the value of the NZ SUPER FUND , my Kiwisaver and investors assets .
This is evidence enough that we need to keep these lefties out of office at whatever cost , because the alternative is too disasterous to contemplate
The unintended consquences of their utter stupidity are an immediate drop in investor confidence and a fall in the value of the NZ SUPER FUND , my Kiwisaver and investors assets .
And you think this is not a command economy dicktat?
KiwiSaver funds held by banks aren't included among the unsecured liabilities to be "pre-positioned" for the Reserve Bank's Open Bank Resolution (OBR) policy meaning, if a bank got in trouble and had the OBR policy applied to it, the KiwiSaver money would remain frozen in full at the behest of the bank's statutory manager.
However just look at the angst in UK and US when markets subside. Their pension funds reflect the current market values and result in inability to meet committments and shortfalls in company contributions.
A great example of good management are the investment trusts in UK which are able to put excess valuations into reserve and pay out only part of income to protect the years when it turns to custard.
Cullen fund and kiwisaver are both for longer term horizons and not your short term limits. Get over it.
It is not only lefties who screw up. It is just that they are less efficient in spin and cover-up.
That is, the state looks askance at the messy process of market-discovered price and production and figures it can do a better job.
Is it not the case SOE legislation is a stepping stone structure to prepare the entity for entry into the world of market price discovery mechanisms?
If so can the author explain this dogged attempt by government apparatchiks to mpose the least market orientated mechanisms to bear upon the outcomes of electricity pricing decisions?
New Zealanders pay substantially more for power than consumers across the Tasman.
In 2010, Australians were paying 14.83c per kwh, while in New Zealand power was retailing for between 22.7c and 24.97c per kwh.
Bertram said that for several years, power companies were revaluing their assets on paper and using that as a basis to increase their prices.
A profitability analysis of Meridian, Genesis and Mighty River conducted by Ernst and Young in 2011 estimated that economic profit totalled $3.8 billion between 2002 and 2011, on total revenues of $42 billion.
Their invested capital rose from $4 billion in 2002 to nearly $12 billion in 2011 but most of this increase - $6.2 billion, according to the companies' annual reports - was asset revaluations, with less than $2 billion representing the historic cost of net actual investment.
Those increases in asset values went untaxed but made their returns on investment look low, which justified price hikes, he said. Genesis did not want to comment on the revaluations and Mighty River said it was a question for the Electricity Authority.
But while consumer prices have soared, industrial power prices have remained stable and commercial prices have dropped.
Bertram said it was because residential customers didn't have the power of big business.
"It's open season to screw anyone who can't fight back."
But he said nothing that was being done was illegal, because companies were free to operate in a way that maximised profits.
"If it's highway robbery, we lock those guys up. But if companies put a gun to your head and take your money, it's knighthoods and bonuses for the CEO."
The price difference between us and Australia is because they use numerous generation methods , including low grade coal which we wont use ,
AND
they have excess generation capacity
AND
they have about 30 ( Thirty ) power retailers , so its real competition in the market .
Are not Vector and Telecom constrained by similar devices. Pharmac does much the same thing to constrain the rapacious drug companies and they still seem to want to sell to us. Any way who cares if private investors do not want to invest in power generation. The government has access to far cheaper money and I would rather that the whole of NZ shared the dividends.
Pharmac is a bad example because what most Kiwi's dont know is that Pharmac is quite a small "BULK" buyer on the world stage .
AND
Negotiating bulk discusonts for medicinal drugs in a seriously compettivie market is not the same as generating elecricity from two rivers and a few hot springs
Also , most countries have Health Ministries which buy much more than Pharmac , such as NHS in the UK , Even the South African Public Health system buys more in bulk than NZ's Pharmac for the 55 million South Africans who use Public Health
My understanding it was either Transpower or it's predecessors ECNZ/NZED - a decision was made to terminate high power transmission to an inappropriate reduced number of points around the edge of Auckland - thus forcing the Auckland power authority to transmit electricity across town with an awkward gas cable solution.
""..That is, the state looks askance at the messy process of market-discovered price and production .... " yeah right
Market disovered pricing.... u must be joking me... I always had the feeling the whole electricity generation industry had a cost plus mentality.... based on the marginal cost of building brand new plants.. ( hydro dams..?)
When u have a history of increasing prices of electricity... year ..after yr..after yr... AND this happenes in a Global deflationary world.... you have to wonder..!!! as well as during the GFC...
that is a hell of an industry..that with market discovered pricing (hehe).... the prices just keep going up.... and by gosh... we have to regulate to stop them going up too much.
I thought that with the Global Financial crisis ..we might have revisited the idea of the Private sectors "wizard of Oz" abilities...
Mr JBWere still has faith in the inherent goodness and honesty of the private sector when given a chocolate cake... that no matter how u slice it... is still a monopoly...
Well it was the infrastructure that failed scarfie..... the line coverings melted under the roads during a heatwave....so the tolerance parameters were , either untested, or not calculated high enough for extreme circumstance.
So your question is who was responsible for the infrastructure failure...?
Should be able to Google that and who signed it off.
The failure was caused by drought not heat. Because the soil surrounding the cables dried out the dampness which allows good heat dissipation in soils was replaced by a good dry insulating soil. Failure of one cable exacerbated the heat generated by extra loads on the others and then another failed as well.
We have just had a drought and no failure in Auckland due to actions taken after the earlier failures.
Let's go read the main article Brendon Doyle quoted from shall we ("California Girds for Electricity Woes"):
"California isn't the only state having trouble coping with a growing share of renewables. Texas also needs more resources"
"A decade ago, California was hit by an electricity crisis marked by price surges and rolling blackouts, stemming from market manipulation and tightening electricity supplies in a newly deregulated market."
"California has been well served by the procurement process since the [decade ago] crisis,"
"By July, state officials hope to have a plan in place addressing the problem"
You know what, this artcle actually supports the Labour/ Green postion, as it is about California doing so sensible central planning to strengthen evenness of supply as they add more load-variable renewables.
As for the capital markets, JBWere might well invest elsewhere, but given people invest in power generation in places like California (in fact if you actually read the article, the problem is that there has been so much recent investment in renewables) that suggests there will be people quite willing to invest in stable producers of a steady return.
Has anyone heard of LOAD SHEDDING ? ....Interesting Labour citing SOUTH AFRICA as the Poster Child for centralised control of electricity .
We went SA to watch the All Blacks play the Springboks and experienced what they call LOAD SHEDDING ......and its a serious cock -up ........ ongoing and very long daytime and night time power blackouts causing traffic light chaos, hotel doors wont open , Bank ATMS seize up, fridges and freezers defrost in the heat , and shops are forced to close .
AND it goes on for days on end , AND the state power company leaves everyone in the the dark metaphorically and literally ..... AND says nothing
I am blown away that Kiwis (who mistrust the Government as much as they do), would even contemplate having to rely solely on the Government as sole supplier , to supply them with electricity at a sub -economic price .
We all know that Government is incapable of managing costs , just look at Municipal Rates and Taxes , council fees and levies and ministerial budgets .
My guess is that it will never happen.
Let the NZX fight their own battles.
BD makes the point several larger issues on NZX are subject to a regulator. The conversation here and now is part and parcel of an enterprise subject to regulation framework.
Has this not been appreciated..
We would be more interested in BDs impression of mrp'S SOUTH AMERICAN adventure and the $20 m plus mrp had to pay the finance types to get their money back.....
We would be more interested in BDs impression of mrp'S SOUTH AMERICAN adventure and the $20 m plus mrp had to pay the finance types to get their money back.....
Henry_Tull, a link to Chalkies explanation of the $20 m MRP paid away - and this bloke Heffernan gets all excited by Labour/Green "socialist" power policies when his actions clearly reflect socialising the losses while retaining the salary profits. Read article
"Government intervention in production usually doesn’t work "
OK so Enron?
"But almost invariably it ends in either taxpayer funded over-supply or rationing"
Over-supply is also whats known as resiliance and competitive.
rationing, oh like Enron? "turn off the generator so the spot price will rise"
"markets", where is the gain for NZers over the last 30 years from free markets? diddly IMHO.
This is superficial, unsubstantiated clatrap IMHO. We need to move on from rubbish like this and start to accept the "free market" isnt except as a licence for teh sharks to have a feeding frenzy. If we cant come up as NZers with the capital we do without something to get it.
regards
Aside from the complete lack of analysis and rigor that one would normally expect when talking about the nationalisation of a country's powergrid or impairment of its private investors is the nakedly mischievous and Machiavellian way in which the greens and labour are trying to scuttle the float of MRP. And what an exceptional display of their hatred of the 400,000 people who preregistered for shares - a very exceptional display of contempt.
Oh FFS, can we stop describing the 400,000 figure as some kind of referendum. There is nothing inconsistent between (as indicated by polls) a majority of New Zealanders being opposed in general to asset sales and 400,000 people going "if they are going to be sold I want an option of a cut".
Equally, there is nothing "insulting" in selling someone something a lower price in return for more limited profits long term than at a higher price for more unconstrained profits. The only insult would be to not tell people what they were getting into when buying, and Labour/ Greens had the honesty to get their plan out in the open so it can be discussed in the light of day.
To pretend otherwise is just intellectually weak.
You could argue a certain amount of disinginuity from both sides...I'd liken it to a Steamroller called privatisation being confronted by a large awkward object that may take a few runs at it to flatten ....if at all..
Yep I'd think it was as much a last stand on the issue as being in the public interest to discuss...I mean let's face it...there will be a handfull of opinions in the public arena, ranging from...could we do with the extra few hundy a year.....to, oh s%&t what's that gonna do to my shares now...to, I don't care...you care..?
I think that's a pretty fair comment Christov.
I think it's a pretty reckless strategy to be honest. Investment even in the best of times is a volatile and scary thing for those new to it or without much. But especially now - when yields are at record lows and volatility remains high - does it appear strange when a very large chunk of the public who are doing nothing wrong - who are just looking for a safe place to put some money and earn an honest return, are threatend by members in their own government. People don't like having their money fiddled with. Especially when its done in such a nakedly vindicative and politically motivated way.
I am a liberal person through and through. But this was just plain silly - and wrong, in my view.
They haven't sold any shares yet. No one has lost a cent on MRP. Sovereign governments should have the right to legislate as they please without consideration of financial markets or corporate profits. The investor protections under the TPP for instance are a joke, corporate welfare/protection with secret adjudication panels masquerading as free trade.
Likewise economic and political debate between parties in a democracy should not be stifled because "investors" might get spooked. No one would be able to say or do anything. If National can run with a controversial policy of privatisation of SOE's, the opposition parties are well within their rights to state what they will do if they become the government, financial markets be damned.
Non listed businesses are affected by local and central government legislation all the time. That's just part of the risk of being in business.
Of course Labour/ Greens are opposed to asset sales (and, by polling, most people are softly opposed). Indeed, I would say they are strongly opposed. And they have now made it clear to potential buyers what that means in terms of a heavily politicized asset. But they have done so before people bought, rather than after, which means it is still in people's power if they pursuance or not.
From what I understand from people in National, this times campaign is based around "Be afraid of the Greens" so I could see National playing this issue, but I can't help wondering if there have been too many years of the Greens acting sensibly in parliament (and cooperating with National on individual issues) for the name alone to promote terror. I really wish National had chosen an evidence based campaign about the economy (I don't know that they would win on that, but the quality of the debate would be higher).
yep ...dh...I'm certainly not pro asset sales, but like most who would have signed the petition equally have found myself quoted ( numbers wise ) among the interested to gain shares.....what do you do..eh..?
It concerns me that the subject of privatisation has become such a pivotal issue . of focus ..presented by Lab /Green given the lack of public understanding in the outcomes both positive and negative....at which point Shearer is forced to point to their pocket in an effort to connect, and this of course devalues the debate , but fairly reflects they ( Lab /Green ) did not want to overestimate the voters ability to comprehend the issue.
In the crappy soap opera N.Z. politics really is , unfortunately, make it simple...and give them a dog fight they understand.......then...curry...bribe ...whatever anyone likes to call it, Favour.
I think it was a thoroughly sensible thing for those who signed the petition, and were in a position to do so, to sign up for at least the option of shares. It has just vexed me that this has been interpreted as active support rather than making the best of the situation.
My unsustained gut feeling is that those spooked into not buying by this will probably largely be people who would not have been buying large enough volumes to really make it worth while (not a financial advisor, not financial advise) so it is probably good that people need to think a bit more about it.
If your 400,000 figure comes to fruition , (my bet would be 200max) thats 10%of NZs milking the remaining 90 ,now thats contempt
If JB Ware are saying they wont have confidence in investing, at least some their clients money, in a low risk, low return , renewable energy generating utility , thats their business.
l
And gosh - the power companies are really knocking it out of the ballpark with their massive profits. So much so that if you bought Contact five years ago on the day you would have paid 8.98 per share relative to today's 5.30. Or say you bought two years ago when you bought at 5.71. No - nothing says uncompetitive pricing power like a big underperformance in share price.
One could attribute this as a failure of animal spirits to overcome the onset of GFC - the NZX50C has yet to recover to levels seen in 2008 - but more than likely represents a failure of management to generate the returns consistent with higher valuations, despite well documented retail electricity price hikes.
Nice use of the little used capital index.
As you imply earnings haven't gone anywhere. For Contact - for instance - operating (ie normalised) EBITDA in FY06 through to FY08 was $557m, 543m, 567m. In its most recent finalised year, FY12, EBITDA was $509m. That suggests either a structural issue with the industry or very poor management. If profits were super then they would have gone through the roof. that hasn't happened.
@Boatman "Bernard is right on the money with this , it actually goes deeper because it shows how Labour and the communists masquerading as Greens are quite cluesless as to how to run a modern sophisticated free market economy.."
Quite right! it doesn't matter how much gloss the Greens is putting on their image. At the end of the day, they are still a water melon party, green on the outside, red and mushy in the inside. And like Pres. Obama said "You can put lipstick on a pig, but it’s still a pig.."
He works for JBWere so of course he doesn't want to see anything that impacts the NZ stock broker business.
Motives aside his arguments are weak, if the only way KiwiSaver Mums and Dads can make money is by receiving fat dividends from companies that are ripping off those same Mums and Dads we have a problem.
Under the proposed plan power companies can still increase profits they just have do it the old fashioned way, innovation and working hard. Only the current method of charging as much as they can get away with will be closed.
I don't think your kids will thank you if you leave them with a legacy of expensive and globally uncompetitive power prices just so you can squeeze a bit more out of your KiwiSaver.
I also don't think it's fair to claim Labour and the Greens proposal of a Fonterra type structure for power is equivalent to going back to the old union system.
Can't say it was definitely down to your superior intellect but I did enjoy reading this.
On a serious note how do you justify continued price rises that are multiples of inflation every year, where prices are much more expensive than nations like the UK who are not blessed with the natural thermal or hydro resources that we are?
It's easy to pull out an example of failed government projects like NZ Rail and compare it to a private success story. I could just as easily point to Government success stories like the NZ Superfund or Kiwibank and refer to failed privatisation stories like the UK rail system.
Let’s not glamourise the private sector where squeezing the maximum profit with the minimum risk and minimum investment is the main goal.
Lastly you trumpet the fact you are building up wealth for your family and grandchildren like it's some highly Nobel goal. Beyond ensuring they get taught good values and given a good education it isn't. Let them find their own way in life and develop true character, don't perpetuate the growing rich poor divide by amassing family wealth. If you want to leave something worthwhile for the future generation look beyond your family and do something to give foster kids and underprivileged kids that same care and a good education.
Education and values get taught by example, not by receiving handouts.
Those kids are all our responsibility, we all pay the cost if they end up on benefits or a life of crime. They also grow up shaping the future society your grandkids will live in, as will their kids and so on.
Did any of us choose our parents? We can't take it for granted if we we're privileged/fortunate enough to be born to family with good jobs and values. Anything we can do to help under priveleged kids grow into contributing members of society benefits everyone. It's the most worthwhile legacy you can leave in my opinion.
While your logic does a good job of removing the personal responsibility away from the haves and onto the have not’s it is not statistically accurate.
Yes we all have freewill, ambition and imagination but apart from a small number of inspired individuals most of us do not have the internal resources to go significantly against the grain. If you are one of the few who does do not assume the same mind and will power your genetics/environment bestowed upon you is available to everyone.
The fact is children growing up on benefits, attending low decile schools and given poor nutrition have much less chance of success than your children/grandchildren. There are things we can do to give them a much better chance, the easy option is use our intelligence to conjure up logic that gives us a clear conscience and absolves us of responsibility.
I repeat: I am not saying greed is good. I am saying that, like gravity, it is a fact of life and a force of nature which you can either work with (eg by using it to encourage resources into their most efficient use) or try to resist (eg by forcing people to spend money in ways which you think are desirable but they don't).
Working with it is more likely to be efficient and effective.
PS: happy, if it would be helpful, to define greed as "the universal and natural desire of humans to want to provide mainly for themselves and their families".
And I agree with you taking exception to Julz' comments. S/he knows no more than you or I do abut what the future holds, and far less than you do about your own and your family's circumstances - and yet presumes to know better than you do, how best to manage your resources for their long term future.
Thank you very much for the advertorial Mr Bernard Doyle ......what business are you in ?
Selling shares ......... what else would you say ?
The "whole system" is rigged ..as long as the Govt, CEO's, sharebrokers. lawyers, accountants, AFA's etc etc get their cut ....ALL at the expense of the man in the street AND whether we buy the shares or not ....
Duly noted in the information provided by MRP, is that any US based entity or person is excluded from the purchase of these alloted shares on offer ....yet you guys go on and on about the "FREE MARKET" what a load of CR*P !! ....I know and you know it's not a free market .... or are you afraid the US might take your cut ???
None of this is to say that the current system, which sets prices at the marginal cost of the most expensive generation, is perfect.
It is very far from perfect as shown by our world's highest electricty prices; and indeed the one sentence shows how generations of hydro developments effectively have been disregarded in the pricing model; given they have close to nil marginal cost, and their capital cost in most cases was long ago written off. (and then conveniently written back in, as Stephen Hulme has noted)
This has been arguably okay while the power companies have been 100% State owned (Contact and Transpower excepted).
We believe there should always be a strong bias toward the status quo.
It is not Labour and the Greens who are making the fundamental changes to the status quo; it is National. In the largest raid on the wealth of New Zealanders since the worst conceived sales of the 1980s, National are seeing this hard earned hydro into the hands of a minority, and for many of them, as a conduit overseas.
The author does not articulate any alternative to either the current far from perfect system, or Labour's proposal.
The consequences of Labour and Greens proposal it seems to me will be relatively foreseeable. It seems likely that a largely tender based system could work on generating, after making some allowances for any genuine cost of production differences among generating companies, if there are any. One imagines a standard price out to retailers; with possible allowances made for any geographical or market mix differences, if there are reasons for such differences. Huge users like Tiwai Pt could easily be catered for as an exception.
Labour Greens do not seem remotely to be suggesting enforcing a nil profit model; so investors looking for a reasonable and fairly assured yield will likely find a share price that delivers that.
...constantly changing regulatory regimes engender and for which NZ already has a poor reputation.
Despite the poor reputation the author says New Zealand has, we seem to be gaining more foreign investment than is anywhere near good for us, judging by a very overvalued exchange rate. I don't think we need to worry about making it clear that consumers always have to be considered in any framework.
It's the National Party who are running a command economy here. Don't forget it. Even if the Labour proposal has a whiff of Stalin.
Apparently our current Government has decided for us that super profits are acceptable. And that market disciplines do not exist for electricity prices is quite alright. Apparently so that financial service companies (JB Were) and thier clients can be supported by this. And I pay a power bill to do so. Protectionism in the extreme.
What next ? Will National establish a new entity called "Maintainance of power company share price board." With power to direct increases in power prices if power company shares look like dropping in prices. (ok - that was a joke)
But remember that this is the party of Muldoon.
Protectionism in the extreme.
What next ? Will National establish a new entity called "Maintainance of power company share price board." With power to direct increases in power prices if power company shares look like dropping in prices. (ok - that was a joke)
But remember that this is the party of Muldoon.
Not a joke.
Check out these two articles here and here in respect of government support for Chorus.
Chorus chief executive Mark Ratcliffe said Chorus would also ask the commission to ‘‘update its policy framework’’ to ensure the success of the Government’s ultrafast broadband initiative.
Chorus has argued that cutting the wholesale price of copper-based broadband by the amount suggested by the commission could undermine the $3.5 billion UFB initiative. That is because it would make fibre-based broadband less cost-competitive in comparison with existing copper-based broadband.
The commission has previously maintained that any such policy change would be a matter for the Government to consider, rather than the commission.
Prime Minister John Key signalled that he might be prepared to intervene in November after describing the commission’s draft determination as ‘‘very problematic’’.
The commission was unable to comment on how long it would take to carry out the full pricing review.
"One imagines a standard price out to retailers; with possible allowances made for any geographical or market mix differences, if there are reasons for such differences. Huge users like Tiwai Pt could easily be catered for as an exception."
This one imagines, that under a politically decided system, the follwing will be perfectly possible:
- a standard price to consumers; with possible allowances made for BMI
- a standard priceto consumers; with possible allowances made for voting history
- a standard price; with possible allowances made for declared IRD incomes
- a standard price; with possible allowances made for CO2 emissions
- standard price; with possible allowances made for recorded use of public transport
What, exactly is to stop this, under a politically driven, centrally planned model?
After all, little citizens, it's all for yer Own Good!
Does anybody seriously think a bunch of overpaid bureaucrats could deliver a viable functioning electricity market over the long term absolute folly! Furthermore imagine the political interference to keep prices down in order to pander to favoured constituencies. Markets are never perfect however interfering politicians always get it wrong
Are you seriously coming in from the perspective that no government ever has done anything at all right? Because I would hope for some slightly more nuanced debate than that. The assets under discussion were built up under government planning, so if they are so toxic perhaps the private sector would be better off building completely new generation, if it must be better than the government built stuff it would surely win out.
There has never been a Green Government, so there is no history. The assets you mention were built between 1910 and the early 1970's, under a variety of Gummints, but in an era where , there was a Depression and two world wars, and the connections between action and consequences ruled. I repeat - there is no form for Green actions.
What yer seein' in this 'ere thread is an urge for the Precautionary Principle.
Prove to us all that a LabGreen Gummint, full of great ideas, social justice for all, young, energetic, inexperienced, no constitutional blocks, nary a successful business background between 'em all - would not foobar the system any worse than the current crew.
After all, under the current (sorry) system, I can switch power suppliers (or, as I do, shop around via PowerShop, thanks, put those commission kilowatts under the front doormat), to effect a personal change.
Try That wiv a Gummint....
Prove to us all that a LabGreen Gummint, full of great ideas, social justice for all, young, energetic, inexperienced, no constitutional blocks, nary a successful business background between 'em all - would not foobar the system any worse than the current crew
Try communist eastern europe
Oh, how I loathe the precautionary principle (when it is commonly misused from wanting a high standard of evidence to refusing to consider evidence). But since you asked for evidence (and it feels really weird for me to be doing anything that seems to be promoting Greens, but I have a strong personal bias for facts, so here are some).
-the Greens being part of the governing coalition in Germany from 1998 to 2005 suggests that it is possible for Green parties to be part of a government without trashing a country's economy.
-I would say that the individual Green MPs in parliament have (on select committees and in voting) been far more sensible than New Zealand First, and New Zealand First has been in government (and may be the only non-single seat partner for National at the next election).
Would this 'Germany', perchance, to be the one that's dependent on Lignite. (Lignite!) For around a quarter of its power generation, and another fifth on Hard Coal (Coal!) after having gotten all queasy aboot Nukular Electrons?
I sense Cognitive Dissonance....
And I repeat - there's no form for Green Gummint.......be careful wha'cha wish for.
Vote Labour, get yer Greens for Free!
Yeah all those efficient cost competitive privately built ports, airports, roads, dams....Privatising big ticket state assets at less than the cost of replacement and with customer and profit bases already in place is the only way the private sector can make them pay. Even then they are often run into the ground, asset stripped or overloaded with debt.
Milford Asset Management has just issued the following press release under the name of portfolio manager Mark Warminger. It says the views expressed are not necessarily those of Milford Asset Management, which holds shares in Contact Energy, TrustPower, and Infratil.
"The Labour and the Green Party announced plans to establish a new agency, New Zealand Power, which would act as a single buyer of wholesale electricity. The plan according to Labour and Green Party analysis would cut the nation's power bills by up to $700 million a year, lowering household power bills by up to $330 a year, and giving the economy a $450million annual boost. This analysis is naïve and does not take into account the full direct and indirect costs.
NZ currently has $253bn of external debt and each 0.01% movement in the cost of debt adds $25m in interest payments. The uncertainty caused by the Labour/Greens Nationalisation by stealth policy is likely to add up to 1% to the cost of debt for New Zealand, due to lenders requiring an increased return for lending to a nation with political and economic instability. The cost of capital for all New Zealand companies will rise due to the same factors. A 1% increase in debt servicing costs for New Zealand’s overseas borrowing, in time would add up to NZ $2.5bn a year.
In addition to higher financing costs for the economy as a whole, the Government would receive around $450m a year less in dividends from the state owned power companies. The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.
The flow on effects to New Zealand’s listed power companies is just as detrimental. Analysis suggests that share prices for Contact Energy, TrustPower and Infratil could on average fall by 20%. This is around $1bn loss of wealth for New Zealanders when adjusted for overseas ownership of these companies. On top of this there will be a cut in dividends for the listed companies of say 20%, further reducing returns to New Zealand shareholders. This will adversely affect many KiwiSaver schemes that have direct exposure to these companies.
It seems inevitable should the Labour/Greens proposal be enacted that the listed power companies would take legal action, based around property rights. This is likely to be lengthy and costly with the Government footing much of the bill.
In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following; $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises, $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development. In the short term this will not be an issue whilst demand catches up with supply but by the time supply and demand are in balance it will be too late to add additional capacity in a timely manner.
Rolling blackouts anyone?"
Its a treat to read the vitriol pouring from the financial hangers-on (National's nasty little back room boys) who were hoping to make a killing out of the sell-off process.
Labour/Greens have torpedoed the privatisation plan and are now favorites at the next election. A brilliant political move delivered with exquisite timing (and no leaks!). National have been wrong footed and Key has lost control of events.
It is indeed. Brilliant execution. I got it a bit wrong back in July. Never thought Labour would have the guts to stand up to the financial markets. Will be interesting to see if they have the fortitude to keep it up http://unframednz.wordpress.com/2012/06/19/labour-could-stop-soe-sales-tomorrow/
Noticeable that the top-end-of-town is coming out with all guns blazing today
And not without emotional unsubstantiated bias:
In addition to higher financing costs for the economy as a whole, the Government would receive around $450m a year less in dividends from the state owned power companies. The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.
Let's mosey on over to the Treasury's Half year Economic and Fiscal Update for 2012.
Page B6 | 33, Figure 2.8 - Net core Crown debt rises from NZD 5.0 billion in 2008 to 25 billion in 2013.
Page B6 | 35 Figure 2.9 - Net worth attributable to the Crown falls from NZD 105.1 billion in 2007/2008 to ~NZD 55.0 billion in 2013.
That's the National Party's record of financial mismanagement - but whose counting except the suddenly disenfranchised.
And the cause of the entire crown debt exlposion rests 100% with Labour
1) Helen Clark SIGNED the Banks Crown deposit insurance scheme in 2008
COST =$ BILLIONS
2) Helen Clark introduced Working for Families to get votes
COST =$BILLIONS a year and is nothing more than middle class welfare
3) Helen Clark introduced Interest free student loans also as a vote catcher , now
UNPAID DEBT NOW =$BILLIONS
4) Helen Clark led the expansion of the Social Wlefare Benefit system by Labour in the 10 years in office means we are now saddled with 160,000 - 200,000 Kiwis living on handouts
COST= $BILLIONS PER ANNUM
Little wonder the Govt is up to its eyeballs in debt .
GO FIGURE !
1) Helen Clark SIGNED the Banks Crown deposit insurance scheme in 2008
COST =$ BILLIONS
Let's not pick the rest of your points to bits without first acknowledging it was the National Government that extended the retail deposit guarantee scheme to SCF, without any justifiable merit.
Yes, and while they did nothing to reverse out any of those policies - they also embarked on lots of their own 'pet' projects - RONs and ultra-fast broadband in particular. And don't forget they also put in place the tax cuts at the high end as well. And then I think they also cut corporate tax rates to below that of Australia - and neither are they prepared to broaden the tax base in any way. Nor are they prepared to address the Accommodation Supplement blow out. And they'll never get rid of WFF unless they raise the minimum wage substantially. So we're subsidizing landlords and subsidizing low end wages. Nuts.
GV @ 4.54 qbove. I have a chunk of money with Milford. But they are wrong on this one. If power company share prices plunge, then just maybe thats because they might be finding their true value. It might cost Milford and me but lets not have anymore of the artifical protection of these companies by the government, and the artificially inflated share prices.
My suggestion to Milford is that they should get out of this obviously over inflated area of investment. And save me some money as well.
Maybe - Government bond trading has been an absolute winner for me in the past, but in principle you are not wrong - just notice how JGB 10 yields spiked up after the BOJO post announcement crash - big money basis point losses for those on the wrong side.
Lets address this nonsense point by point.
There are investors in companies as shareholders, and separately in loans to the public and private sector. The $253 billion in NZ debt is presumably the combined public and private debt which by the by has enjoyed super returns for the last few years due to a perpetually rising exchange rate. Labour/ Greens are not proposing any default at all on debt, so the effects on the cost of it don't add up, other than at some stage we have to wean ourselves off an overinflated exchange rate in any case, so investors or hedge funds eventually have a risk of devaluation.
It is the current government who are choosing to forego 49% of future dividends from these companies. Having said that, I expect a number of these companies would actually start competing, and find cost savings that they have had little incentive to find until now. Government taxes would increase from increased corporate profits (from lower power bills), and general growth in the economy from higher consumer spend.
Are the profits to Contact, Infratil and Trustpower that derive from generating and retailing proportionate to their original investments? I suspect they are doing very nicely indeed in the current model.
It will be interesting to see if there is any legal action by Contact, Trustpower or infratil. I would be surprised to find they have any property rights that guarantee them a particular type of market, or future profits. MRP and other SOEs would certainly have no such rights, as the change has now been well flagged before any sale, and the government will not sue itself.
The $253 billion in NZ debt is presumably the combined public and private debt which by the by has enjoyed super returns for the last few years due to a perpetually rising exchange rate. Labour/ Greens are not proposing any default at all on debt, so the effects on the cost of it don't add up, other than at some stage we have to wean ourselves off an overinflated exchange rate in any case, so investors or hedge funds eventually have a risk of devaluation.
Based on closing NZX data the NZ government stock benchmark 10 year note spread over US T10s remains at historic lows for the year @ ~155 bps.
The claims being made about the loss of wealth to NZ'ers due to kiwisaver share portfolios dropping in value are incorrect. The sale of MRP is a transfer of wealth to the section of society that is already quite wealthy, thy can at least afford to spend money on shares. The Labour /Greens plan simply transfers the wealth back to all NZ'ers. Many people do not have employment or they are in a low paid job unable to afford Kiwisaver. These people are as entitled to a share of the communally owned assets as all the financially savy people licking their fingers at the prospect of increasing their fortunes. As for blackouts. Blatant scaremongering
The claims being made about the loss of wealth to NZ'ers due to kiwisaver share portfolios dropping in value are incorrect. The sale of MRP is a transfer of wealth to the section of society that is already quite wealthy, thy can at least afford to spend money on shares. The Labour /Greens plan simply transfers the wealth back to all NZ'ers. Many people do not have employment or they are in a low paid job unable to afford Kiwisaver. These people are as entitled to a share of the communally owned assets as all the financially savy people licking their fingers at the prospect of increasing their fortunes. As for blackouts. Blatant scaremongering
Bollocks ..... there is no such thing as someone with a job in NZ who cannot afford to pay a mere 2% to KIWISAVER , and get 3% paid from his employer and another ANNUAL $500 in cash from the IRD .
My son earns $14 an hour at a yogurt factory and contributes to Kiwisaver , although he says he is almost the only production line worker that does
Staying out of Kiwisaver to "save" a mere $10 a week shows a distinct lack of the basics of financial discipline and frankly a distinct lack of common sense
Especially when the employer pays in another $15 a week and IRD gives him $500 ( this was $1042 a year) and with interest , it adds up to over $2000 a year
Compounded he has accumulated around $10,000 in just three years.
Okay , has anyone got a calculator in the Labour / Greens coalition?
AND
What happened to last weeks LABOUR / GREEN plan to build and provide $300,000 houses in Auckland ?
I am ready and willing to pay cash for three brand new homes for each of my 3 kids at $300,000 a pop .
Now they propose writing off an ANNUAL $700,000,000 in revenue, another ANNUAL $365,000,000 in dividends from power companies and a few hundred million in Tax in pursuit of an ideological nirvanna.
How do they propose replacing these revenue streams ?
Labour and the Greens are committing to policies that we cannot afford and which are simply wishful thinking
They might start with this IMF research paper by Benes & Kumhof http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Or Adair Turner and Overt Monetary Finance http://www.fsa.gov.uk/static/pubs/speeches/0206-at.pdf
Or Huber & Robertson
http://www.jamesrobertson.com/book/creatingnewmoney.pdf
Or Milton Friedman
Milton Friedman is rightly seen as a central figure in the development of free market economics and in the definition of policies required to guard against the dangers of inflation. But Friedman argued in an article in 1948 not only that government deficits should sometimes be financed with fiat money but that they should always be financed in that fashion with, he argued, no useful role for debt finance. Under his proposal, “government expenditures would be financed entirely by tax revenues or the creation of money, that is, the use of non-interest bearing securities” And he believed that such a system of money financed deficits could provide a surer foundation for a low inflation regime than the complex procedures of debt finance and central bank open market operations which had by that time developed.
http://www.fsa.gov.uk/static/pubs/speeches/0206-at.pdf
When a government funds new development , or nationalises power generation and supply it has three risky options in funding this
1) Tax ( I for one , already pay too tax much and cannot afford more)
2) Borrow ( Ask Robert Muldoon The government has to find the interest to pay lenders)
3 ) Print ( Ask Robert Mugabe , the Weimar Repoublc and the Argentinians about these risks )
Each of these is a minefield and I would like to know how Labour is going to pay for this policy
Ok I concede that point and well done your son. What about the elderly the disabled and the unemployed. Why should they not benefit from the sale of assets many have contributed to through tax. Also if this discourages overseas investors from putting money into NZ then it should result in a lower NZ dollar. Therefore another group being disadvantaged by thiis share sale would be exporters
You do raise some good and interesting points , and I take you point that the people have paid for these assets , but its a good idea to bear in mind the Government is not giving these assets away for free, they are keeping control and just selling a minority share in them and releasing some capital to be used in other social assets like schools and hospitals, roads , clinics , and possibly some new assets in oil and natrual gas development
Kiwis will all receive the proceeds of these sales ..... be it through new schools and hospitals or disability benefits to the disabled , the NZ Super to the aged and the unemployment benefit to the unemployed
Boatman - take a breather. Overtime, ticker, you know.
Then think.
This 'release of capital'. It was actually 'release of the ability to earn off it', according to old econmics, right? (I say that, because new economics is about having ownership of real stuff - money was just a proxy, bit tenuous where we're headed.
That 'ability to learn' should be bankable.
I remember, playing monopoly, that when you started turning them over, you were headed out of the game.
You a 'pollie' ?
I hate to suggest this but maybe it is time that we learnt about Monetary Policy.
The best , simplest, easiest to understand is here.
http://www.youtube.com/watch?feature=player_embedded&v=0zEbo8PIPSc
It was from a lecture at Columbia University given by L. Randall Wray, Research Director of the Center for Full Employment and Price Stability and Professor of Economics, University of Missouri-Kansas City
He starts at just after the 4 minute mark. There is a short test at the start. You will enjoy it.
Not being so brilliant myself I listened to it 3 times, the third with another person, we discussed it and I think I finally got it.
I think that at some point we all need to know how this stuff works or we just end up talking past each other.
It is a US lecture but it relates to countries like ours with their own currency
"One imagines a standard price out to retailers; with possible allowances made for any geographical or market mix differences, if there are reasons for such differences. Huge users like Tiwai Pt could easily be catered for as an exception."
Looks like my list needs to be Extended, to cover Apple's latest catalogue of Deserving Beneficiaries:
- a standard price to consumers; with possible allowances made for BMI
- a standard priceto consumers; with possible allowances made for voting history
- a standard price; with possible allowances made for declared IRD incomes
- a standard price; with possible allowances made for CO2 emissions
-
standard price; with possible allowances made for recorded use of public transport
- standard price; with possible allowances made for date of birth
- standard price; with possible allowances made for disability and long-term ACC dependency
- standard price; with possible allowances made for employment status
- standard price; with possible allowances made for <insert your fave Cause here>
Gosh, common taters, now if only I had the contract to handle all these exceptions to the normal centrally planned Price, to keep them up to date with the Latest BrainWave of a Greenish hued Pollie, and (oh happy day) to convert the whole thing from a nice functional web/database combination supplied by one of them Nasty Capitalistic Cartels, (no names, no pack drill, but they useta be called International Computers and Tabulators), to an Open Source Platform, powered by a Pack of Undeserving Capitalists pedalling furiously away at bicycle driven generators on the front lawn of the Beehive under the watchful gaze of ...
Well, maybe I'm going a leetle far here.
Powered by horses walking in circles, no, hang on, PETA.
Powered by Billions of Bacteria, happily enslaved in dark chambers full of nutrients extracted from aforesaid Capitalists....
Yes!!!!!
Oh, why, that feels soooo Powerful........Russell, hand me a Royal Assent Signerator!
Appletree: If the shareprice declines it's precisely because "the elderly the disabled and the unemployed." will be paying much less for electricity. Good for them.
Do you advocate they continue to pay hugely artificial high prices just to keep the shareprice up. Do you think these superprofits are justified - I don't. Do you not realise the group you list are often going without heating now because they can't afford it.
Mist. It's the shareholders who have been carried. By a lack of competition. If you don't like "carried" you are like me. Advocate for competition.
Ratios ! Completely artifical now. Capital values plucked out of thin air. You have seen the examples numerous times throughout these posts.Your "analysis"above is illusory.
Farmers are a significant group who have been rorted by the current cosy setup. Shareholders, like me, have ridden on their backs. You think that ok obviously.
Swingeing generalisations there Mist
You forgot to take into account (or failed to mention) one huge group .. migrants .. that large heap of people who arrive .. impose an immediate incremental increased demand on an asset before they have ever contributed to it .. so persuade us with some, you know, facts, statistics .. how much additional generating capacity has been added in the last 10 years .. compared to the number of migrants that have arrived in that same 10 year time period .. not net migrants .. ignore departures .. because those leaving have contributed something toward what they've now abandoned .. and then .. finally what are the stats for the number of kilometers of poles and wires now, and, 10 years ago .. c'mon convince us all .. we are waiting .. facts mist .. facts
Mist is vehemently opposed to land based taxation which would tap into rising land values so that land-lords would help pay for the services that underpin their increasing unearned capital gains.
Meanwhile, I've just received an email of another price hike for fixed gas line charges from Genesis.. the trouble is if I were to shop around I would pay two months of power bills to break contract.... competition you say?! Competition my bottom!
Saving $$$$ through private competition of energy???
It's all a load of bollocks
the rich get richer and the peasants keep paying for the rich to get richer.
Apologies for lowering the tone but all the above was spinning my head.
Snippy - the privatisation was always a shaky proposition in a democracy.
Only a minority can benefit, at the expense of a majority. Tap into that majority, and you're in.
The only hope for the Nats was that they locked it in, in some unlockable way, or that an inept media failed to ask the questions we are overdue the asking.
Given that Think Big is seen as the Big Folly:
The projects were hit by an incredible stroke of bad luck, Easton says.
“The price of oil was against us.”
According to BP the price of crude oil in 2009 dollar values rose from about US$10 a barrel in 1970 to more than US$90 by 1980, before falling back to about US$30 in the mid-1980s.
“[If] they’d been in position five years earlier [or] 10 years later they would have been a success.”
The problem was that the risk was written so the Government took all the downside and none of the upside, Easton says.
//
“I don’t think anyone now looks back and says the dam shouldn’t have been built,” Birch says.
In the climate of the time the projects were the right decision and had been thoroughly researched and debated, he says. “I don’t think there was a failure among them.
//
Sir Roger Douglas, Minister of Finance from 1984 to 1988, says the foundation of the projects was false.
“They were based on escalating [oil] prices that we had in the 70s and that was never going to [continue to] happen,” Douglas says.
“They were failures essentially.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10703096
……………………
Total production by the top five oil majors has fallen by a quarter since 2004
http://www.resilience.org/stories/2013-04-19/total-production-by-the-top-five-oil-majors-has-fallen-by-a-quarter-since-2004
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