This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
There is a well-developed economics theory of competition which explains how a market with a myriad of small firms works. It requires freedom (ease) of entrance and exit. There are benefits from such ‘pure competition’ (and also some turbulence).
The conditions for purely competitive markets rarely apply, but often the structure of a market is near enough (or near enough with tweaks – what is called ‘workable competition’). However, the theory hovers over our thinking about markets generally. Thus the policy response: ‘we just need more competition’ to fix a market dominated by a single or a few firms (monopolies and oligopolies). Another is: ‘we just need a market regulator’. We have had commissioners in some markets for a couple of decades and we are still not satisfied. Such policies may well have some benefits but the market still works poorly.
We are trapped into the thinking we were taught in Econ101 about pure competition. Sometimes we need to think more radically. Here I focus on the number of significant firms in the market. The trick about pure competition is that the individual firms do not have to think a lot about other individual firms; rather they focus on the market generally and their customers particularly.
As the number of market players reduces, businesses start looking at one another and responding according to how they think their competitors will behave. You might think that this will be beneficial to their customers, but what this sort of behaviour can lead to is that the incumbents connive to raise prices. No, not meeting in smoke-filled rooms, but by working out how their competitors behave the market can, in effect, behave almost monopolistically. There are number of experimental studies involving players separated in different rooms who nevertheless work out how to attain cooperative outcomes without direct communication.
I was once taught that where there were more than five significant firms in an industry that the gaming became too complicated and the industry began to behave like the competitive businesses that workable competition was based upon. However, the ‘five’ was a rule of thumb; in particular circumstances it might be six; it might be four.
As it happens, New Zealand is riddled with markets where there are only a few significant players: one (domestic) airline, one port per region, two supermarket chains, three petrol chains, four banks, four electricity gentailers (generator-retailers). There are, of course, smaller firms in each market but each is dominated by a handful of players.
We should not be surprised that there often few market players in small isolated New Zealand. So we need to break away from dependence on theories developed for much bigger markets. At the time when the privatisation of the state electricity system into a number of competing companies was talked about, I looked at the size of electricity companies in the US to get a sense of where economies of scale ran out (as you would expect in a properly competitive market). The typical size was about the same as the entire New Zealand generation market. The implication is that we were trading-off economies of scale for alleged benefits of competition, albeit in a market in which there were only four significant players. (There have been instances in which the gentailers have clearly been gaming one another at the expense of consumers.)
There is a recent report by the NZCTU which draws attention to the fact that from 2014 to 2021, the four big gentailers distributed $8.7b in dividends but earned only $5.4b in profits. Firms that do this usually go bankrupt, but not in this case. It is a bit complicated to explain but, briefly, a monopoly is able to borrow secured against its future profits and pay the borrowings as dividends. That is what the gentailers have been doing.
New Zealand’s electricity industry faces a major restructuring as we struggle with climate change. Evidently we are going to have to reduce or eliminate our use of coal, gas and oil. We need to integrate better non-corporate-provided renewables (such as solar panels on rooftops); because their output fluctuates with the weather, we need additional ‘battery’ storage capacity. The local aluminium smelter is on its last commercial legs, with the potential to release a large block of electricity production into the domestic grid. In a couple of decades we are going to have a radically different electricity system.
How are we going to get to it. I fear that our thinking is too incremental, focusing on short term changes to the existing system in the vague hope that they will culminate in the new very different system. I cannot see any path which will efficiently lead to it given the current ownership structure. A set of competing businesses in an industry which needs restructuring is clumsy.
Allow me to make a proposal which will horrify the ideologues, but aims to get some longer-term sustainable and efficient system under way. Perhaps we need to renationalise the electricity industry to enable us to get the structural changes we need. Yes, it will be expensive, but less so in the long run when we get it wrong.
Some will react that nationally owned industries failed in the past and we should not reverse privatisation. I am more pragmatic. Public ownership can make sense, especially when there is the need for major restructuring as occurred in Britain after the Second World War. When the industry settled down, privatisation made sense. (In the New Zealand context, the privatisations of the 2010s deepened our share market, and increased opportunities for local investment.) But equally pragmatically, it may be necessary to renationalise an industry when major restructuring is required.
The danger is that a government may do the renationalisation with the best of intentions to restructure but a subsequent one will interfere for political purposes. That is a risk we have to take; it will be better than the current buggering around.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
46 Comments
Essentially the National Government made BS promises when they sold the privatisation of the electricity infrastructure to us. These promises have never been realised. Nor was it publicised that they wrote into the regulations the requirement for the electricity companies to pay the government huge dividends. Brian makes a good point about the market being too small, with too few players. Nationalise the whole lot, remove the need to pay dividends, fix electricity charges at affordable levels (none of the "its the market" crap) and strengthen and future proof the infrastructure.
Much better to leave privatised and change the rules to suit the needs of people and climate change. Government ownership would lead to a 3 electricity.. drive up costs and leave infrastructure in a mesa
Simply have ongoing targets for decreasing their carbon foot print, whilst increasing production, mandaory infrastructure in investment and reducing consumer costs. Failure to comply having significant increased on tax and fines. They will moan but if ignored they will have to evolve
They will soon wake up (as shareholders come down hard on the boards to hit their KpIs and be profitable) or those that are weak will go broke and then the govt can buy them for a song.
Job done.
Ps right now they have it way too easy.
Utter rubbish. Private companies will ALWAYS prioritise profits and shareholders over customers and national good. There it too much 'free market' evidence of that to be able to ignore and explain away. The market never works properly. Brian tries to explain 'pure' competition and why it doesn't work in NZ, but I'd suggest it never works - anywhere as various players are always trying to manipulate the markets, so in effect there can never be 'pure' competition. People are always trying to cheat!
I am not suggesting for one moment that private companies wont extract money for shareholder, or will do a great job. quite the opposite.
The problem is that the alternative - being increased government control - s a million times worse. Look at everything our local and national governments are trying to do at the moment.. 3 waters, poly tech integration, health centralisation, mental health investment, RBNZ KPI setting, covid spend, kiwibuild, road upgrades... . The more they take on the less effective any of it becomes (as the few people who are make decisiones get lost in all the noise and the people beneath them all take advantage of the chaos - its like 'yes minister' on acid now). And the more money tax payer pours into black holes.
Better to stop trying to do it all and get better at a few things - including getting really hot at managing rules and consequences for private entities.
It's more about the regulations that sit behind the organisation.
I agree 3 Waters is/will be a disaster, and that recent governments have been hopeless around these things. But that doesn't mean that it can't or shouldn't be done. Just that it needs to be set up right.
"Private companies will ALWAYS prioritise profits and shareholders over customers and national good." Yeah,nah. One only has to look at housing where government intervention has made people suffer. We have people living in cars forking $15/tank to give to foreign tree growers.
https://www.aei.org/wp-content/uploads/2022/07/cpi2022junea-3.png?x91208
https://www.aei.org/carpe-diem/what-economic-lessons-about-health-care-…
No Profile. The government didn't intervene in housing. They tried to play the market and got burnt. Kiwi build was never about intervening, just trying their own hand at being a developer in an out of control market. In the meantime they utterly failed to regulate the market, and in this they dismally failed the people of NZ, especially the younger generations!
Oh please. At the very least Government artificially restricts the supply of land and building materials. If we adopted earthquake prone California and Japan building codes the artificial shortage of plaster board would disappear overnight. Kiwibuild is just another apt demonstration of government incompetence in housing - be it blue or red flavour.
We should have the ability to produce most of our own building materials but we have shut down our sawmills and now send our timber to China unprocessed and we have no control over this because we have sold off our forests. We have our own steel mills and supplies of cement and gypsum and so we should not have a shortage, we just need to utilise our own resources more effectively rather than just rely on importing everything.
There is no shortage - just crony capitalism from red and blue protecting local vested interests. The sort of crony capitalism the results in eye watering section prices, gib shortages and people living in cars.
NZ produces far, far more wood that it could ever use locally. Half of the lumber processed here is exported. Plenty of privately owned forests for you to choose from.
But hey, be kind, and keep those people living in cars and the local vested interest rich.
The problem with publicly run organisations is that they always prioritise the comfort and job security of their employees over their 'customers' or the national good.
The complete absence of competitive pressure means there is no incentive for efficiency, so they effectively behave like monopolies. That's how you end up with business cases costing $100M etc etc.
For example, my rates bill has gone up considerably more than my electricity prices.
Don't let the evidence get in the way of your argument...
So if there is no evidence that privatised companies are inherently more efficient than public companies, what makes you think nationalised companies would suddenly become less efficient?
No one is calling for every industry to be nationalised, just need to stop pretending that the gentailers are operating a competitive market.
Privatisation projects are not a good example to compare private and public efficiency. They often end up being monopolies and keeping their bloat. That's not a good representation of what happens in the other direction.
The electricity market is far from perfect, but some competition is better than none.
I'm less concerned about who who actually owns the organisation, than that nationalisation removes all competition.
This is the best article he's penned.
The problem is that the morph has to be planned, and for the long term.
Capital doesn't think long-term.
Leaders can - dont often do, but can. That is the difference, and in the situation we find ourselves in, it's a crucial one.
For heavens sake, no.
Labour in Australia has just nationalised natural gas, or are trying to, because left governments are reckless with peoples lives, and you bet they have blackouts and chaos coming.
A country that is rich in natural resources but nationalises them is heading for third world.
... although it looks like New Zealand is well on the way there also, and for the same reason, as we've just nationalised water, and given control of it to 13% of the population based on race.
By this stage the West is so stupid we probably deserve what we get as we vote these reckless magical thinkers in: but god its depressing to see the thinking of our economists also. Utilitarianism is just a form of communism. Close the universities down and just keep trade schools would be the best thing we could do to try and build a future back (and no vote if you've not paid tax - and civil servants don't pay tax, that includes teachers).
But do I sell Woodside, Contact, Genesis and Mercury? .... On the Aussie nonsense I'm worried about Woodside, because I suspect their new LNG supply contracts with Germany are also under threat with nationalisation, as is their home market stuffed. ... Who would bother going to the huge risk and expense of extracting energy anymore?
No one. That's why the West is headed for dark years under the policies of these treasonous monsters in power in the West. But could economists please read some political philosophy (and Ayn Rand).
Great way to start a Monday.
"A country that is rich in natural resources but nationalises them is heading for third world." - Norway is doing alright - https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway . We are far more like Norway than South American or Eastern European countries.
MH - the magical thinkers are folk like you. Parasitic (as in: contributing nothing) on a temporary. drawing-down system, arguing for?
Self.
We need long-term sustainability - as in: maintainable near indefinitely - systems. Your way of going about things, doesn't get there.
It's not only the generators,we also have a myriad of lines companies and retailers all trying to extract a profit from the same service and they all have to have their own highly paid management team and CEOs.
All of these additional costs are passed onto other businesses and end up making our economy less competitive.
The main mechanism that Gentailers use to game the market is by exploiting the dry year risk situation. They do this by under investing in new generation, the timing of their maintenance shutdowns etc. Some of them have been caught doing this by the electricity regulators. If the govt built enough storage (the NZ Battery Project) so the risk was reduced or ideally eliminated then gentaliers would not be able to exploit this risk. So the govt doesn't necessary need to nationalized the whole electricity industry it can simply created a nationalized supplier of last resort entity.
Using a pumped hydro project like Onslow to do this would have the added benefit of buying excess renewable energy to add to its storage capacity when the price is low (thus evening out wholesale electricity prices somewhat). This higher low demand electricity price situation will encourage greater renewable electricity investment (because new generators will have a better idea about what the worst price they will get). Which will lower the barrier to entry for new renewable suppliers thus helping the competition situation.
These new renewable suppliers could even be consumers with rooftop solar that have excess summer electricity production that they are happy to sell. And the NZ Battery entity is happy to buy at low summer prices because they know they can sell it at a higher price in winter.
Won't the cost v return on that last bit of energy that takes the country to over capacity be the most expensive? Otherwise it would already have been done.
Essentially this becomes a mechanism to suppress the spot price of the existing gentailers. It feels like a lot of cost and risk would be put on tax payers to try and achieve a lid on power prices.
Would there be some entrenchment in this such that a National government couldn't sell down a stake in Onslow when they get their own electoral mandate?
Would a better solution be to subsidize solar power to households? For the total cost of building (and subsidizing Onslow in weather years that it's hardly used) how many roof tops could we slap solar panels on?
Solar without storage in NZ would be massively inefficient. Because our days are so much longer in summer generation is skewed towards the summer season but electricity use/demand is skewed towards the opposite season - winter. If NZ without storage built enough solar to meet winter demand then we would have a massive surplus of power in summer. Studies have shown this 'overbuild' option is very expensive, much more expensive than increasing the storage capacity of the electricity system.
"a monopoly is able to borrow secured against its future profits and pay the borrowings as dividends"
What? No, that is not what the gentailers have been doing for almost a decade. Do you think a company can continue to borrow money to pay dividends forever? The truth is that profits don't mean cash receipts. Depreciation, as an accounting term, is taken out before you report profit, and electricity companies have massive depreciation, more than what is required for maintenance capex. That is why their dividends are higher than profit.
I am not sure which company you think does not plan for the long-term, and does not estimate future demand and supply, but I am glad that you are not the CEO, and even more glad that a politician is not in charge.
The only way I can see the Onslow project being a plus for the nation is for the entire generation industry to be nationalised. Otherwise Onslow will require such complex regulation of how it is operated to avoid disadvantaging any given generator in any given circumstance. It will be a nightmare to govern.
The problem with nationalisation is it becomes at the board level jobs for the governing party cronies and probably even at the executive level. I very much doubt that nationalisation will come without the requirement of dividends.
When Labour with Clark and Cullen were in they had the opportunity to take no dividend and reduce the cost of electricity to consumers. Did they do it, no. There were numerous beefs then about the on and upward spiral of electricity costs and they still wanted their dividend.
Generation and retail combined is very problematic. Would like to see that split first before ant thought of nationalisation.
I understood Govt is still the majority shareholder in 3 of the gentailers - so in a position to influence them at a strategic level - and has of course also been the recipient of 51% of the dividends
I dont see any evidence that nationalisation will drive efficiencies - certainly none greater than the current model. Health service is instructive
My choice would be
1. Govt contracts for the dry year requirement - thereby reducing risk -so govt could contract to keep Huntly available as a national interest contract for example 9 although they are currently doing a poor job of interfering resulting in an increased coal burn
2. Generators be removed from retail operations
3. Review consenting/buy in contracts - to make it as simple as possible to generate electricity and sell to the grid (and it should be noted that when generation was a govt monopoly they bankrupted people who tried to do this)
Its funny isnt it. We had a Nationalised power system for most of the history that NZ generated electricity. It worked quite well, kept prices low and built almost all of the infrastructure in use today that was then sold off cheap and now generates huge profits for the gentailers, and costs everyone else a bomb.
Tinkering around the edges does nothing, time to actually admit our market is too small to have an effective competitive market and get on with building things again in house without the profit motive.
Rinse and repeat with roading, rail etc.
Nothing these days can get built on time, is substantially more expensive and we have worse outcomes of dropping investment. Thats what unproven ideology gets you.
The problem with the gentailers seems to be more a tax and finance issue,with higher dividends demanded by their shareholders ( which includes the government) the latter also having received both large dividends and tax on its strict monopoly transpower.
The Government rather then reinvesting into the transmission of generating assets,uses the funds to offset the winter energy bills (around 510 m pa).
The main problem is that electricity prices have not increased in real terms since 2012,whereas the generators have seen both inflation and significant carbon tax charges,small capex only replacing generation as it comes due.This is mostly due to demand also reducing for electricity for residential and industry due to efficiency changes,(this year NZ will use around 1500gwh then 2021) ,
Pricing changes going forward will be EA levy,lines companies,and Transpower from 1/4/2023 with the pricing regime changes being reduced in the South Island,and increasing further North to reflect actual use of infrastructure.
Lake Onslow just got kicked into 2023 by cabinet,this will be a very expensive project,that will create large market distortions,there are existing pumped options in the waitaki basin complex (where the system was designed to have pumped options such as the canals)
At least you are presenting an alternative point of view Brian. Where ‘the market’ is failing to produce the desired benefits we require. Just please let’s do it competently. What is it about many of our Government Departments inability to manage a process properly? MIQ, vaccination rollouts, immigration settings to name a few. Is it too much to ask for competency with Govt. Departments? Mind you, the politicians who lead us and them never acknowledge and apologise for errors like the rest of us are compelled to do. If the bosses cannot be held accountable then no wonder their Departments constantly get away with cock ups. Our parliamentary culture needs to change to be more in line with what is happening in many private enterprises and our own households. Stop this adversarial nonsense and step into the 21st century. Only then will they gain the respect of the public.
I had the good fortune a couple of years ago to attend a leadership training course presented by a lady who had spent in excess of 40 years teaching leadership throughout NZ. One thing that stuck with me was her comment about leadership in NZ. We have plenty of managers in this country but very few leaders. Hence why our businesses struggle to succeed and our politicians make decisions that fly in the face of what the public want. Too much focus on ‘the process’ and not enough on leading the team in the right direction.
They have to understand where we're going, to be able to lead in the right direction.
Any idiot can lead by saying 'more growth' - but that is, and always was going to be, suicidal.
The best comment from a current G7 leader this year, came from Macron.
Despite urging, this is what the NZ media reported ( ) of and about his statement.
The difference between that, and lying purposely, is - indecipherable.
So we need not just good leadership heading in the right direction (a sustainable pathway, rather than an unsustainable one), but we need journalists as well informed. So the rest can be informed. To vote for the appropriate leaders. And round we go...
Saying "more growth" is not leading PDK. It's just spouting an existing mantra. (I realise you're using it as an example) Spouting the current mantra of an organisation, what ever it is is not leading. An awful lot of organisational heads stuff their managerial layers with sycophants which quickly identifies them as lazy, and not really leaders. A good leader isn't threatened when their staff or events challenges their vision. These provide opportunities to reinforce, strengthen or adapt to changing circumstances. A good and smart leader will know this and relish any challenges.
What we have seen across the world, not just NZ, is that we are over burdened with big egos claiming to be leaders, but the evidence of reality is that they are anything but, and even worse managers!
I suspect the lack of "leaders" is a world wide problem, not just a local one.
In practice though politics rule. I have seen superb leaders get steam-rollered by the political machine in organisations as they've focused on leading their team and doing the job not playing the political game. Managers tend to play the political game very well though. Organisations get what they deserve.
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