The privatisatisation of local electricity supply

In 1999, Jane Kelsey wrote,

“The privatisatisation of local electricity supply companies and state-owned generators was also very lucrative and open to abuse to market power by transnationals. Driven by theory, governments had progressively dismantled the integrated state electricity system since 1986. This involved separating transmission from generation, splitting the state-owned generator into competing companies, and converting the elected non-profit power boards into profit-driven electricity supply companies. The Labour government began the process by corporatising the electricity department in 1986.

The local power boards were transformed into electric power companies in 1990, and into commercial electricity supply companies with diverse ownership structures in 1993.

A rash of hostile takeover bids and friendly mergers followed; during this time, supplying electricity seemed almost a sideline.
The main foreign-owned players were Alberta-based TransAlta and Utilicorp from Kansas. The companies raised their electricity prices to cover debt servicing and profit requirements.
The government expressed concern that electricity companies were abusing their monopoly over the power-lines and supply contracts to block the entry of competitors. The Electricity Industry Reform Act 1998, passed in July under urgency, prohibited any company from owning both electricity line businesses and retail or generation businesses from 1 May 1999.

Labour opposed the move, claiming the government had taken “an electricity industry that was working pretty well in practice and ripped it to bits, because it was not working well in theory”. The existing companies, supported by ACT, complained that the split reduced their value and amounted to expropriation. TransAlta  threatened to pull out of the country if the government proceeded with the plan.
At the same time, the change created new opportunities for mergers and takeovers (at grossly inflated prices), consolidating control of electricity into fewer, and increasingly transnational, hands.

The government also split the state-owned generator into two companies, Contact Energy and ECNZ; ECNZ was later split into three companies.Contact Energy was publicly floated in March 1999. Some 175,000 local investors applied for priority registration. But the government had decided there had to be a 40 percent ‘cornerstone’ shareholder. Only two companies were in the final bidding – TransAlta and US-based Edison Mission Energy. TransAlta was already the country’s largest energy retailer, with 530,000 customers, and was returning a dividend of around 6 percent. In October 1998 the Ministry of Consumer Affairs condemned its customer contracts as ‘onerous and harsh on consumers’.

The Commerce Commission cleared TransAlta to take up to 50 percent of shares in Contact Energy. That would have given the company one million of the country’s 1.6 million electricity customers, control over two-fifths of New Zealand’s generating capacity, and rights to nearly half its gas production.
The strategic stake went instead to Edison, for $1.21 billion…

… Contact Energy ended up nearly 62 percent overseas-owned. In addition to Edison’s 40 percent, another 18 percent of shares were reserved for offshore institutions, 14.4 percent for New Zealand/Australian institutions and 27.6 percent for the New Zealand public. Investment anlyst Brian Gaynor calculated that half the shares issued to offshore institutions  were sold for instant profit in the first three days. He partly attributed the priority given to offshore buyers to “broker self-interest”, estimating  that they earned $7.6 million on the 109 million shares issued to northern hemisphrere institutions (much higher than the proportionate income from Australasian sales).

Gaynor questioned why government officials put so much effort into selling the country’s assets to foreign interests , thus worsening the balance of payments , instead of working to stimulate export growth. 

The government insisted that the changes would lower electricity prices to consumers (although Commerce Minister  John Luxton said ‘it was not promised that householders would necessarily get cheaper power’). But they failed to do so, as the companies sought to recoup their excessive spending.  

In anticipation of winning the Contact Energy bid, TransAlta had paid $171 million for the retail business of Orion, owned by the Christchurch City Council; the operation was independently valued in 1997 at around $13 million. In March 1999 TransAlta announced price rises of between 5 and 15 percent for it’s 530,000 customers. Energy Minister Max Bradford blamed the line companies for abusing their  monopoly and not passing on savings from the transfer of metering costs to the retail companies.Orion backed off its suggested price increase. TransAlta did not. Bradford insisted that competition among the supply companies would eventually force prices down, so only the monopoly line businesses needed regulation.

Back in 1998, Bradford had proposed only light-handed regulation: ‘to enhance the credibility of the threat of price control’, the Commerce Commissionwould be given powerto limit prices, where it was efficient to do so, and after a lengthy period of review. By May 1999 he had been forced to introduce legislation that could regulate monopolies generally, with specific provisions for line  companies.  The Commerce Commission would be required to authorise  a price for line company charges by 31 December 1999 for the largest companies, and dates in 2000 for the rest.” – “Reclaiming the Future“, August 1999

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There are many lessons to be learnt from the de-regulation and privatisation of the electricity industry in this country…

1. In buying up companies, the new owners raised electricity prices for consumers so as to re-coup the costs of their multi-million dollar investments.
2. Many of the electricity companies wound up in overseas investors’ control. As Brian Gaynor said, this made our Balance of Payments much, much worse – for no discerible, logical gain.
3. Competition did not bring “cheaper power prices”. There simply was no competition.

It probably occurs to many people that, thirteen years later, another National Government is on-course to repeat the same mistakes.

“Those who cannot remember the past are condemned to repeat it”

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