The Dim-Post

March 5, 2013

The elephant in the river

Filed under: finance,Politics — danylmc @ 10:52 am

Via the Herald:

Ordinary New Zealanders will be favoured “at every turn” of the Mighty River Power share sale which gets underway today, says Prime Minister John Key, who has pledged at least $2000 worth of shares for those who want them.

Labour leader David Shearer said Mr Key had so far been unable to explain how he would prevent more than 15 per cent of Mighty River shares going to overseas investors.

Green Party co-leader Russel Norman said the $1 million advertising campaign “shows National knows how unpopular this policy is … They’re doing everything they can to try and sweeten the deal”.

Ownership transferring to overseas investors and the dividend stream leaving the country is one possible outcome here, sure. But another VERY possible outcome is that the majority of ownership ends up in the hands of ‘ordinary New Zealanders’ who then lose all their money when Mighty River is mis-managed into bankruptcy. Solid Energy only collapsed a couple of days ago, and there’s nothing stopping Mighty River’s executives from borrowing crazy amounts of money, using it to pay out dividends for the first few years and rewarding themselves with spectacular bonuses and then walking away rich men when the debtors call in the receivers.

Indeed, that’s one of the rationales for the asset sale – it shifts some of the risk of failure away from the government and onto the shareholders, which is fine if the shareholders can manage that risk by monitoring the company and diversifying their investment portfolio – which funds like ACC, the Super Fund and the KiwiSaver providers will all do, but which ‘ordinary New Zealanders’ mostly won’t.

Given the proximity of these events – Mighty River float, Solid Energy collapse – it’s a little weird that the opposition aren’t more focused on the fact that the government is giving New Zealanders terrible investment advice that could cost them a lot of money. I guess the objection to the sale has always been in economic nationalist terms, so it would sound odd if they turned around and told kiwis not to invest in these assets. But it seems like someone should.

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86 Comments »

  1. well if investment in a company such as Mighty River is a bad idea then any other investment in an NZ company would have to be an extremely stupid idea in comparison.

    So given Labour, at least, promotes NZers investing in the “productive sector” then saying there’s nothing really worth investing in would be rather counter productive. But that is what Gosgrove’s been implying by the govt selling Mighty River “at the bottom of the market”. And if that were true then any sensible person would be jumping to by the shares since that’s exactly the time to by.

    (i think having institutional investors such as kiwi super investing should give what ever oversight is possible)

    Comment by NeilM — March 5, 2013 @ 11:50 am

  2. Catherine Delahunty
    Catherine Delahunty is a current New Zealand MP representing the Green Party who was first elected to parliament in 2008. As of 2012 she is the Green Party spokesperson on Education, Mining, Toxics and Te Tiriti o Waitangi. Wikipedia

    Comment by TransportationDevice A7-98.1 — March 5, 2013 @ 11:53 am

  3. But another VERY possible outcome is that the majority of ownership ends up in the hands of ‘ordinary New Zealanders’ who then lose all their money when Mighty River is mis-managed into bankruptcy.

    While this could happen (example AirNZ collapse and effective renationalisation 2001) it is not necessarily likely (counterexample Contact Energy; rapacious management but still a functional company due to their ability to gouge customers and the States unwillingness to preice regulatye the wholesale electricity market.)

    IMO it all comes down to the strength of the electicity pricing/supply regulatory regime and inflight rework of the Companies/Crimes Acts to be more punitive wrt infringements by company officers; fairly hands-off under the current regime, but likely to be a degree stiffer under a Green-Labour govt.

    Comment by Gregor W — March 5, 2013 @ 12:02 pm

  4. Except that if MRP went out of business, we’d have powercuts. The government would be forced to step in with a bailout to avoid this, which, if the dams have been mortgaged, would involve paying the lenders.

    Comment by rich — March 5, 2013 @ 12:20 pm

  5. So given Labour, at least, promotes NZers investing in the “productive sector”…

    This isn’t really investing though, from the point of view of the country. It sure looks like investing from the point of view of an individual: I buy shares, I subsequently get a dividend and/or later sell the shares for a greater face value.

    However, the money that the government makes from selling Mighty River, (or other assets), will not end up being used by Mighty River to fund new projects. The money will be used by the government for something else (fund debt, constructing roads of dubious significance, returned to wealthy via tax cuts, etc)

    The asset sales are not about investing in NZ. They are about transferring the ownership of *existing* investment from the current public owners to new private owners.

    Comment by RJL — March 5, 2013 @ 12:27 pm

  6. Except that if MRP went out of business, we’d have powercuts. The government would be forced to step in with a bailout…

    Not necessarily. The beauty of the primacy of parliament is that the Power-cos could conceivably be re-nationalised, with the shareholders / creditors possibly taking a bath without recourse.

    Obviously this is the ‘nuclear option’ as it wouldn’t look good to the WTO, international finance etc. but there is certainly precedent.

    Comment by Gregor W — March 5, 2013 @ 12:50 pm

  7. As I mentioned this all sounds very Catherine Delahunty.

    Comment by TransportationDevice A7-98.1 — March 5, 2013 @ 1:14 pm

  8. AND the Nacts expect that 40% of the float will end up overseas!!!!!

    Comment by DR — March 5, 2013 @ 1:27 pm

  9. “They’re doing everything they can to try and sweeten the deal”.

    Don’t know about you, but to me that sounds like a really good reason to invest.

    Comment by billbennettnz — March 5, 2013 @ 1:32 pm

  10. diversifying their investment portfolio – which funds like ACC, the Super Fund and the KiwiSaver providers will all do, but which ‘ordinary New Zealanders’ mostly won’t.

    Most ‘ordinary New Zealanders’ view a diversified portfolio of investments as 3 different rental properties. Any shift toward the sharemarket is, in my view, a good move.

    Comment by Phil — March 5, 2013 @ 1:34 pm

  11. could conceivably be re-nationalised, with the shareholders / creditors possibly taking a bath without recourse.

    Can you imagine the party of Clark, Goff and Shearer doing this? Me neither. And since Labour in their present state won’t take us past an election, the present environment has at least 4 years to bed-in. Unless the Greens can manage to peel of National voters who feel tricked or disappointed. While that hasn’t happened yet, it’s not impossible.

    What is more likely is that the Greens are able to push a Labour Government to drive a strong regulatory framework under these parties. The investors take their haircut, and we now have privately owned semi-public-good utilities. National comes in again in 202?, harms us by deregulating everything – predatory semi-monopoly pricing is again engaged in and investors get their profit taking, the assets are run down and then on-sold at lower prices, and in 2032 The New-Green-Labour Government begins a process of building new state assets and progressively freezing out private companies from the energy system, which will need massive new construction and investment. In 2047 National…

    Comment by George D — March 5, 2013 @ 1:36 pm

  12. the pre-reg site has had huge traffic, be interesting to see if we get a break down of how many people, how much etc. The cynic in me expects there to be less than 80% disinterest.

    Comment by NeilM — March 5, 2013 @ 1:38 pm

  13. …and, probably, a soupcon of uninterest.

    Comment by paritutu — March 5, 2013 @ 4:12 pm

  14. >Except that if MRP went out of business, we’d have powercuts.

    Not necessarily. Ah, Gregor W said it, no need to repeat. That isn’t the worst case.

    The worst option is also the most likely. It’s sold for a crap price, power bills go up, but the company is not actually more profitable to shareholders because management takes the difference.

    The only circumstance under which this sale would not give me the shits all round is if the government actually did use the money to just make another power organization of equal size to MRP. Which, in theory, it should have exactly enough money to do. If it doesn’t, then it’s selling it too cheap.

    Comment by Ben Wilson — March 5, 2013 @ 4:13 pm

  15. Having ACC, the superannuation fund and various Kiwisaver funds all monitoring the actions of the board and selling shares if they think the company is being mismanaged, sounds like much less efficient oversight than having the government as sole shareholder monitoring the actions of the board, and firing them if it’s being mismanaged. It’s also less effective oversight if all they do is sell the shares, rather than band together and vote the directors out.

    Comment by kahikatea — March 5, 2013 @ 4:18 pm

  16. Most ‘ordinary New Zealanders’ view a diversified portfolio of investments as 3 different rental properties.

    Most ‘ordinary New Zealanders’ view a diversified portfolio as a little cash in their wallet, half a loaf of bread and and a packet of instant noodles in the cupboard and a $500 overdraft facility to cover bills between paychecks.

    Comment by Gregor W — March 5, 2013 @ 4:27 pm

  17. Gregor, you’re confusing “most” with “minority of the moment”

    Comment by Andrew M — March 5, 2013 @ 7:46 pm

  18. The worry that “‘ordinary New Zealanders’ will lose all their money when Mighty River is mis-managed into bankruptcy” doesn’t make much sense.

    If you buy $2,000 of shares in the IPO then all you can lose is $2,000. If that’s your entire life savings then you have big problems to start with.

    If you go out after the IPO and acquire more MRP shares until they make up a very high proportion of your porfolio, and then you lose your shirt, then it’s your fault for not diversifying better.

    A.

    Comment by Antoine — March 5, 2013 @ 8:22 pm

  19. Is the risk of this happening with Mighty River greater than with any other company? Danyl appears to be overshooting here – this isn’t just an argument against asset sales, it’s an argument against any investment by individual shareholders.

    Comment by Hugh — March 5, 2013 @ 8:34 pm

  20. “Except that if MRP went out of business, we’d have powercuts. The government would be forced to step in with a bailout…”

    MRiver has assets, the receivers would sell those assets to the higest bidders (which might recover loads of money… or not) but the assets are likely to continue producing electricity.
    No one has been able to explain to my satisfaction why a cash cow like a power company (that has REAL assets) has a lower rating than a thinly capitalised bank that gambles every day.

    And what Hugh said, but amplified to ANY shareholders, individual or institutional.

    Comment by Clunking Fist — March 5, 2013 @ 9:13 pm

  21. When John Key says “ordinary New Zealanders” he of course means “people like me”.

    Comment by Sanctuary — March 5, 2013 @ 10:07 pm

  22. “…it’s a little weird that the opposition aren’t more focused on the fact that the government is giving New Zealanders terrible investment advice that could cost them a lot of money. I guess the objection to the sale has always been in economic nationalist terms,…”

    Not really Danyl. There is little prospect of stuffing up the operations of MRP, given that electricity generator model has been running the same way for pretty much a century. A Tranz Rail-Toll Rail type asset-strip and share dump is possible, but journalists will be watching MRP for exactly that type of behaviour.

    The danger is Clunking Fist, that we do get Danyl’s type of rundown of MRP, which means the ‘assets’ can be sold, but need a complete rebuild to function reliably, which was the Kiwirail analogy.

    Labour of course, offer no renationalisation promise to counter National’s part-privatisation, showing Labour really wanted to sell our power generators, but lacked the balls.

    Utilities should always be in public ownership and operation – we taxpayers will have to pay for it if private owners stuff up anyway, so we may as well get the dividends.

    Comment by bob — March 5, 2013 @ 10:35 pm

  23. Hugh in answer to your question, In Finance as a utility (electricity) MRP is likely to have an underlying Asset beta in the range of 0.2-0.3. Beta describes the correlated volatility of an asset in relation to the volatility of the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.

    Many utilities stocks have a beta of less than 1 (i.e., not volatile). Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

    Beta however does not tell you anything about the quality of corporate governance, and in response to kahikatea – the quality of corporate governance oversight is likely to be improved by having a wider range of investors applying scrutiny, rather than current relying soley on Crown Ownership Monitoring Unit (COMU) and the occassional financial journalist picking up on a press release. Opposition parties (of any colour) have a poor record of doing any due diligence on Crown Assets, they tend to rely on one day getting into government and then finding out all the bad news, then they just ignore it because its easier to do nothing than put hard effort into ensuring crown asset performance (for which voter interest is either keep them or sell them, rather than ensure there performance).

    Comment by WH — March 5, 2013 @ 11:06 pm

  24. Contact Energy and Trustpower are privatised and were not asset stripped or run into the ground…

    Comment by antoine — March 6, 2013 @ 7:41 am

  25. Stop talking facts you two we want some good old fashioned academic speculation and slighting of the mercantile classes..

    Comment by TransportationDevice A7-98.1 — March 6, 2013 @ 8:48 am

  26. If the float goes well – ie many NZers get to have small share holdings, not much goes off shore then National will have an on-going winning narrative running up to the next election. If there is a sizeable number of people who get into the share market who otherwise would not have then I doubt they’ll be paying much attention to National’s critics.

    I’ve never been convinced that Labour is all that opposed to the partial sale and their critical analysis has been very shallow, not raising itself above “the rich and foreigners are stealing our assets”. Now that it’s happening they’re stuck with no fall-back position.

    Comment by NeilM — March 6, 2013 @ 9:42 am

  27. I’m really not following your argument Danyl – it reads like you think owning any equity is a terrible idea as it possibly could be mis-managed? Or just former SOEs?
    Or are you saying the Govt is acting purely as an owner trying to raise the price, and ignoring any additional civic role it may have in educating the public re investment risk (above and beyond its obligations under investment law as the seller)?

    Comment by garethw — March 6, 2013 @ 12:33 pm

  28. bob @22 “The danger is that we do get Danyl’s type of rundown of MRP, which means the ‘assets’ can be sold, but need a complete rebuild to function reliably, which was the Kiwirail analogy.”

    But MRP don’t currently constatntly fight and argue about their subsidies like the rail operator did. They produce power and sell it in a sort-of market, or they produce none and risk getting their balls cut off.

    Did anyone care about Kiwirail under Toll? Probably not, but we did care about the idot action in buying it back at a stupid price. Let me see if I can remember which party was stupid enough to do that…

    Garethw, he can’t possibly be saying “owning any equity is a terrible idea” because his state sector pension must have its funds invested SOMEWHERE (or does he think it sits in a shoebox and taxpayers give him 5% a year?)

    Comment by Clunking Fist — March 6, 2013 @ 1:16 pm

  29. Stop talking facts you two we want some good old fashioned academic speculation and slighting of the mercantile classes..

    Did someone call my name?

    I think danyl’s point is that the way the Government is trying to structure the ownership basis for MRP makes it particularly vulnerable to a separation of ownership from control, in that a widely disbursed and only slightly interested set of shareholders will not be able to exercise disciplinary oversight of a management group that may as a result go out and pull a Solid Energy on them. This, then, isn’t a statement that ALL forms of investment in private enterprise are bad, rather a suggestion that an investment in a company with these (politically driven) restrictions on ownership is particularly at risk of such outcomes.

    Of course, danyl may be wrong in thinking that a widespread initial distribution of shares will carry on for long. My assumption is that lots of people will buy an allocation, hope the price goes up a bit, then quickly sell them off to some institutional purchaser (like one of the Kiwisaver funds) which will be able to monitor in a better fashion.

    Oh – and, stupid business people. How common.

    Comment by Andrew Geddis — March 6, 2013 @ 1:40 pm

  30. He may indeed think ” that the way the Government is trying to structure the ownership basis for MRP makes it particularly vulnerable to a separation of ownership from control, in that a widely disbursed and only slightly interested set of shareholders will not be able to exercise disciplinary oversight of a management group that may as a result go out and pull a Solid Energy on them” and I would argue that he is wrong because the gummint will still own most of it so there will be beauraucrats looking at its performance and a whole slew of market analysts slavering at the thought of brokerage commission, and he is overstating the potential risk by some magnitude.

    Comment by TransportationDevice A7-98.1 — March 6, 2013 @ 2:30 pm

  31. because the gummint will still own most of it…

    Until MRP undertake their first round of capital raising as a private company and want to do so via stock offering rather than bonds.

    Comment by Gregor W — March 6, 2013 @ 2:35 pm

  32. True. I’d like to think the Gummint would take control of that process as majority shareholder though.

    Comment by TransportationDevice A7-98.1 — March 6, 2013 @ 3:02 pm

  33. I would argue that he is wrong because the gummint will still own most of it so there will be beauraucrats looking at its performance …

    Like with Solid Energy? Anyway, I thought the point of the partial sale was that the attendant market rigour would compensate for the inability of the State to run a business?

    …and a whole slew of market analysts slavering at the thought of brokerage commission…

    Sure. But it might be hard to convince small shareholders to sell out if poor management causes the share price to drop below its offering and they are fed a message of “hold on – better days are ahead!”

    But all this, I note, is simply academic speculation.

    Comment by Andrew Geddis — March 6, 2013 @ 4:04 pm

  34. I’ve asked some economist mates if they can explain to me why the MOM model isn’t the worst option out of; MOM, State ownership, or full privatisation, and the only answer I got was a tentative, ‘well, if you wanted to unload some risk but retain control, you might have an argument’.

    But the funniest part of it to me has been to see so many alleged economic liberal small state types lining up behind it. Very keen to invest in a government controlled company. Certain, they are, that their capital can be put to much better use by the state than anything they can think of to do with it. No problems with moral hazard, no worries about the fact that the government won’t be getting the best price (in spite of their deep concerns about the deficit). There is amusement anyway, to be had.

    Comment by Pascal's bookie — March 6, 2013 @ 4:09 pm

  35. Pascal, I tend to think that the different models don’t really matter much. What’s more important is the specific history of the firm and the market environment that it operates in. There are well run and profitable state owned firms, and badly run ones. There are well run and profitable private firms, but also badly run ones which sometimes get bailed out by the state. Ownership per se is only one of many determinants of how well run a firm is, and whether it will fail or require external support.

    Comment by Dr Foster — March 6, 2013 @ 5:35 pm

  36. I have a mate at MRP who says the company is f***ed. Apparently it has plenty of important assets due overhauls, ie. dam generators. He says the co has already been run into the ground and whoever buys it is buying headaches. Doesn’t bode well for investors expecting instant divis. Nor for reinvestment in national infrastructure.

    You heard it here first.

    Comment by nigelsagentinthefield — March 6, 2013 @ 10:38 pm

  37. Nigelsagentinthefield,

    Evidence or you made it up.

    Comment by antoine — March 7, 2013 @ 8:56 am

  38. @ Clunking Fist – disputes between rail track provider Ontrack and rail train operator Toll Rail were circumvented by Labour nationalising it all under the banner of Kiwirail. And track charges were irrelevant to Kiwirail’s relationship with it’s owners…

    Dodgy as the buyback price for Kiwirail was, it was the major trucking firms that demanded the govt ensure Kiwirail didn’t fail – they use it heavily for their intercity freight. The danger with the SOE sell-offs National are doing, is we get a similar situation – run down assets needing public bailouts for us to keep the lights on reliably.

    And please don’t say the private shareholders will pay – they didn’t for South Canterbury Finance et al.

    Comment by bob — March 7, 2013 @ 2:15 pm

  39. Bob – it didn’t happen to Contact or Trustpower…

    Comment by antoine — March 7, 2013 @ 2:54 pm

  40. “it was the major trucking firms that demanded the govt ensure Kiwirail didn’t fail ” Eh? Can you link to some proof of that pls? (And what antoine said)

    Comment by Clunking Fist — March 7, 2013 @ 6:18 pm

  41. I dunno, I just feel like people are starting from the partisan position that the sales must be bad, and then trying to find reasons to justify that position. Often quite ill informed reasons.

    A.

    Comment by antoine — March 7, 2013 @ 6:56 pm

  42. The sales don’t stack up economically – we (New Zealand) get more money spend on essential services and for further investment by retaining full state ownership and the dividends that come with that. This aversion to borrowing at the low interest rates available to the government comes from people who have either an upsettingly simple view of how things work (debt == bad!), or believe they stand to gain personally from the sales (or maybe some just don’t give a shit and simply get a kick out of opposing anything the “lefties” think is a bad idea).

    Every dollar in dividends is a dollar the government doesn’t have to find from somewhere else (e.g. increased taxes, reduced services, etc). Not to mention the mindnumbing ridiculousness of privatising the natural monopoly industry that is New Zealand’s power generators – I hate to be the one to break it to you bright young sparks, but privatising a taxpayer-funded monopoly asset that provides an essential service doesn’t even come close to resembling a free market.

    Despite all this I can’t help but find it grimly amusing to watch the greedy assholes who are always the first to loudly declare their economic literacy try and spin the sales as a wise move. No business would be so stupid as to sell the golden goose in the depths of a depressed market for what will amount to a measly sugar rush, destined to be frittered away on the CEO’s pet projects, i.e. environmentally-damaging intensive irrigation and unaccountable, taxpayer-funded private schools.

    If we were selling part of a powerco to buy ourselves a new internet cable or two (so that the investment in fibre-to-the-home wouldn’t be such a waste of money), and fund a bunch of IT/IS R&D then I mightn’t be so against the plan.. but all the so-called “business party” can come up with is more fucking cows and welfare for private schools? What a sad and pathetic joke.

    Comment by Rob — March 7, 2013 @ 9:15 pm

  43. Actually on reflection, *some* businesses might be that stupid, but they certainly wouldn’t stay in business very long.

    Comment by Rob — March 7, 2013 @ 9:33 pm

  44. Rob

    Electricity generation is not a natural monopoly. Are you thinking of electricity transmission?

    Ps I never said I supported the asset sales

    Comment by antoine — March 8, 2013 @ 8:05 am

  45. In New Zealand’s case I think generation is a monopoly. The power stations were created with generations of taxpayer dollars, not a market-based model and it is unlikely we will see many more generating stations built in the near-to-mid future.

    All the low-hanging hydro fruit has already been plucked and destroying more river valleys isn’t a particularly palatable option anyway. I can’t exactly set up a thermal, fossil fuel or nuclear-powered electricity generator and start selling it to my neighbors. Purists might argue this is all the fault of the Big Bad Government but I think regulatory interference in this area is pretty necessary seeing as virtually every form of power generation has negative effects on the ecological and social environment.

    The sheer size of building a power station pretty much limits the potential constructors to megacorps and government. I’ve read that nuclear power generation simply just isn’t viable without major government support, coal/oil/gas generators are probably a bit cheaper but the emissions are certainly a cause for concern and I am of the opinion we should be trying to reserve these energy sources for applications that require it (i.e. air travel/freight, container ships, production of steel, etc).

    So the question really becomes whether you want the generator in the control of Omni Consumer Products or a government which the people get to elect. I struggle to envision a scenario in New Zealand where the choice doesn’t eventually boil down to this.

    As wasteful as it would be (multiple transmission lines with different owners starting and terminating at the same place), I think electricity transmission is actually less of a natural monopoly than generation.

    Comment by Rob — March 8, 2013 @ 9:20 am

  46. Rob

    It is ridiculous to say that electricity generation is a natural monopoly in New Zealand or any other developed country.

    We have six mid-size to major generators all of which have recently invested in new generation plants and are actively considering future generation options. Build of larger projects may be slow for the next few years, due to low electricity demand growth, but there are still projects in the pipeline (Ngatamariki, Mill Creek, Te Mihi) and more will follow in future years.

    We have small hydro schemes cropping up around the country, and dozens of medium to large wind farm projects proposed (http://windenergy.org.nz/nz-wind-farms/proposed-wind-farms)

    Private individuals can also put in a wind turbine in their backyard or a solar panel on their roof.

    Your suggestion of building a second transmission grid in parallel to the existing one is also ludicrous.

    A.

    Comment by Antoine — March 8, 2013 @ 10:01 am

  47. @Rob – Electricity generation is definitely non a natural monopoly, as opposed to transmission and distribution which certainly a natural monopoly is in the NZ context (for reasons of population, geography etc.)

    While the mode might be different (i.e. gas or coal generation versus hydro), large scale electricity generation does have the characteristic of being essentially non-substitutable which is why the production, transmission, distribution and sale naturally lend themselves to strict regulation.

    Comment by Gregor W — March 8, 2013 @ 10:29 am

  48. apologies for terrible typing.

    Comment by Gregor W — March 8, 2013 @ 10:29 am

  49. IIRC the six mid-size generators were created by imposing a bastardised market model on plant that was built and operated by the New Zealand government over a number of decades. They are not the result of a naturally occurring energy-supplier market – their positions were handed to them by the government.

    Small scale hydro is great and a windmill in your backyard combined with photovoltaic panels are wonderful, but it takes 20 years (at current power prices) for the investment in PV panels to break even (by which point they are likely to have degraded in their output). I have no objections to private enterprise being involved in these sorts of ventures – the barrier to entry into the market is far lower, the scales involved smaller and the technologies involved more experimental, making these endeavors more suitable to a market-based solution.

    The other problem with PV panels and wind turbines is that while they might work well at powering your off-the-grid bach/commune, or supplementing the major generating stations, you simply can’t run an economy on them – they are far too volatile a source of electricity. I believe the most cost-effective and desirable approach (from a grid-engineering perspective) is a number of large generating stations in combination with effective energy conservation settings (insulation, solar water heating, backyard windmill, etc).

    I agree the secondary transmission grid is ludicrous, but only slightly less-ludicrous than having major generators run by a mishmash of corporates who all push their electrons down the same wires.

    Major generating stations are almost entirely tied to geographic location for their ability to generate power. Do I have to explain that a hydro dam in a valley with no water flow, a geothermal plant in an area with no geothermal activity, a coal/gas-fired generator that is a significant distance from fossil fuel reserves, or a wind turbine farm in an area with no wind are not going to work? In this sense I struggle to see how there is much difference between the transmission lines and the generators. In fact I think these components are best viewed (and probably operated) as a single functional system as that is how they were designed.

    Comment by Rob — March 10, 2013 @ 1:45 pm

  50. Rob, I don’t think generation is a natural monopoly. But it could become a monopoly nonetheless, without any need of such a monopoly being natural. With 6 suppliers, that’s only 2 mergers and acquisitions away from there being one company supplying more than half of the power. This is a small enough country that there are plenty of companies with enough financial resources to pull that off. Privatization is another step in that direction (the first was making them SOEs, which was pretty shit too, our power costs fucking heaps more than it should because they are *required* to extract profits). It’s what happens in this country. Our telecoms is still mostly supplied by the one shop, our milk by another, all grocery distribution by another.

    Comment by Ben Wilson — March 10, 2013 @ 7:13 pm

  51. Yeah I always thought the partitioning up of the generators into a number of SOE’s was a weird thing to do, it’s pretty obvious now that it was just done to make their eventual sale easier. The profit-extraction from the SOE’s is slightly more palatable when all the dividends go to the government, so it’s effectively a roundabout form of taxation – I figure the cash has got to come from somewhere so if it wasn’t taken out of our power bills we would be paying it elsewhere.

    I still think that if the lines are considered a “natural” monopoly then the generators are too. Just because it’s easier for people to envisage a single company running a generating station than it is for them to envisage multiple transmission lines straddling the country doesn’t really change that imo.

    The lines may be somewhat restricted by geographic features, but not nearly as much as the generators themselves.

    Comment by Rob — March 11, 2013 @ 11:12 am

  52. I remember watching Enron: The Smartest Guys in the Room and I recall all those employees whose only investments were shares in the company. They fell to pieces when the company went belly up. Diversification is a far better option. Loads of banks offer professionally managed unit trusts to invest in with quite a low initial investment ($1000 in most cases – in the special case of Bonus Bonds with its unpredicatable dividend lottery it’s $20). A much better way of generating some diversity.

    Comment by Pete — March 11, 2013 @ 11:42 am

  53. Without wanting to be glib about it, Rob, the fact that there already ARE multiple generators of electricity operating in New Zealand means that generation cannot, by definition, be a monopoly industry.

    via wikipedia: A natural monopoly… is a condition on the cost-technology of an industry whereby it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm.

    Comment by Phil — March 11, 2013 @ 11:51 am

  54. I’m sorry that you think that the current setup in NZ doesn’t meet wikipedia’s definition, Phil, but that direct quote you have pulled from the page does appear to succinctly describe the situation we have in NZ with the power generators: “most efficient for production to be concentrated in a single firm”. How is the funding of multiple boards of directors, grid architects, the additional inter-company negotiation required to achieve a functioning network, etc more efficient? Seems a bloody wasteful and overly-complex approach to operating a power grid to me.

    Also as I mentioned above, these multiple companies were created by the actions of government bestowing them with plant and equipment, not a naturally organising market.

    We could slice $government_department up into pieces and declare each of them to be a separate SOE tomorrow, would this result in a properly functioning market? I doubt it.

    Comment by Rob — March 11, 2013 @ 12:10 pm

  55. Rob, Phil assumed you didn’t have an economics textbook handy, nor a dictionary. Otherwise, he would simply have referred you to these. “Natural Monopoly” is a technical term. It supersedes your, um, common-sense definition.

    Comment by Clunking Fist — March 11, 2013 @ 12:53 pm

  56. the biggest omission from this debate is that electricity is critical infrastructure. seriously fucking critical. maybe i’m outspoken but, this operation by virtue of it’s importance to society (and the economy which serves it) should be not be subject to market forces, at all. electricity is a utility. if we follow this logic we should privatise the police force too; as they are equally as important as an electricity grid from an infrastructure security perspective.

    Comment by barf — March 11, 2013 @ 2:08 pm

  57. Rob – For a natural monopoly to exist in power generation, it would have to be demonstrable firstly that Company A (e.g. Meridian) could produce and market electricity for a lesser cost per MWh than Company B in the same market (e.g. Contact) – including bringing new plant online to increase production – and secondly, that a brand new generating powerco emerging in the same market (e.g. General Electric NZ or somesuch) would be reasonably precluded from entering the market due to natural barriers to entry.

    It’s worth noting though that the transmission infrastructure is a monopoly under Transpower while (weirdly) access infrastructure is not, even though both are reasonably classed as natural monopoly.

    So yes, while it is complex and doesn’t seen to make much sense, generation as opposed to transmission is not strictly a natural monopoly.

    Comment by Gregor W — March 11, 2013 @ 4:49 pm

  58. If shitty wordpress would display my previous comment you’d see I found a number of links on the first page of google that a “natural monopoly”, all of which appear to apply to the situation with NZ’s power generators.

    Sure they’re not a dictionary or an economic textbook but a number of them even used power generation as ‘classic’ examples of natural monopolies.

    Comment by Rob — March 11, 2013 @ 4:58 pm

  59. Seeing as that comment worked, I’m going to repost:

    Yeah sorry I only have the internet available, would you care to quote the definition of this technical term from your handy economics textbook/dictionary?

    from http://www.investopedia.com/terms/n/natural_monopoly.asp

    “A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.”

    “The utilities industry is a good example of a natural monopoly. The costs of establishing a means to produce power and supply it to each household can be very large. This capital cost is a strong deterrent for possible competitors. Additionally, society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.”

    from http://www.businessdictionary.com/definition/natural-monopoly.html

    “Situation where one firm (because of a unique raw material, technology, or other factors) can supply a market’s entire demand for a good or service at a price lower than two or more firms can. Such situations occur usually in case of utilities or where a market can support only one producer (because the decreasing returns to scale make the optimum plant size large in relation to the demand) or where long-range average total cost is declining with higher output throughout the range of the possible demand”

    from http://www.economicsonline.co.uk/Business_economics/Natural_monopolies.html

    “A natural monopoly is a distinct type of monopoly that may arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply.”

    “Natural monopolies are common in markets for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities.”

    from http://moneyterms.co.uk/natural-monopoly/

    “A natural monopoly is a monopoly that arises from the nature of an industry.”

    from http://www-cs-faculty.stanford.edu/~eroberts/cs181/projects/corporate-monopolies/benefits_natural.html

    “A natural monopoly exists when average costs continuously fall as the firm gets larger. An electric company is a classic example of a natural monopoly. Once the gargantuan fixed costs involved with power generation and power lines is payed, each additional unit of electricity costs very little; the more units sold, the more the fixed costs can be spread, creating a reasonable price for the consumer. Having two electric companies split electricity production, each with their own power source and power lines would lead to a near doubling of price. Clearly, competition, the flagship of the American economy, is not always the answer.”

    Comment by Rob — March 11, 2013 @ 4:58 pm

  60. Hmm.. maybe some spamprotection is taking issue with the links?

    Let me try again, without the links.

    “A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.”

    “The utilities industry is a good example of a natural monopoly. The costs of establishing a means to produce power and supply it to each household can be very large. This capital cost is a strong deterrent for possible competitors. Additionally, society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.”

    “Situation where one firm (because of a unique raw material, technology, or other factors) can supply a market’s entire demand for a good or service at a price lower than two or more firms can. Such situations occur usually in case of utilities or where a market can support only one producer (because the decreasing returns to scale make the optimum plant size large in relation to the demand) or where long-range average total cost is declining with higher output throughout the range of the possible demand”

    “A natural monopoly is a distinct type of monopoly that may arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply.”

    “Natural monopolies are common in markets for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities.”

    “A natural monopoly exists when average costs continuously fall as the firm gets larger. An electric company is a classic example of a natural monopoly. Once the gargantuan fixed costs involved with power generation and power lines is payed, each additional unit of electricity costs very little; the more units sold, the more the fixed costs can be spread, creating a reasonable price for the consumer. Having two electric companies split electricity production, each with their own power source and power lines would lead to a near doubling of price. Clearly, competition, the flagship of the American economy, is not always the answer.”

    Comment by Rob — March 11, 2013 @ 5:00 pm

  61. So yeah, all youse smartypants cunts trying to nitpick over some ‘technical definition’ of natural monopoly can go and fuck yourselves.

    Cheers,
    Rob

    Comment by Rob — March 11, 2013 @ 5:02 pm

  62. BTW, I’d like to see a copy of Clunking Fist’s dictionary/economic textbook definition of natural monopoly.

    Comment by Rob — March 11, 2013 @ 5:09 pm

  63. Rob, it’s pretty much the same as Phil’s wikipedia defn. By the way, that “utilities” example you provide (please state where you got it) is pretty crappy: the LINES are a natural monopoly, but generation isn’t. If generation were a natural monopoly, you see several first-world countries with one producer. What you actually see, is several first world countries with ONE national grid, cities with ONE lines company.

    Comment by Clunking Fist — March 11, 2013 @ 7:47 pm

  64. Here’s an analogy: electricity is to power lines, as freight companies are to roads: it is not feasible to have two competing power lines or two competing road networks leading to your home, but it IS feasible to have two power companies or two courier companies compete for your custom.

    Comment by Clunking Fist — March 11, 2013 @ 7:51 pm

  65. Rob

    I still disagree with you on some definitional issues, but I do see a commendable spirit in your 5:02 comment

    A.

    Comment by Antoine — March 11, 2013 @ 8:04 pm

  66. CF: You say the lines are a natural monopoly, seeing as you don’t provide any further illumination as to why I’m going to assume this is because:

    a) Geographic features mean that there is often only a single cost-effective route for the lines to take
    b) The cost (i.e. barrier to entry into the market) of creating a duplicate set of transmission lines is prohibitively expensive, not to mention wasteful

    As I have have stated above, power plants are exceedingly expensive (creating high cost/barrier to entry into the market).

    They are also intrinsically linked to geographic location (at the very least anything with a steam turbine requires access to a large amount of water) this feature of the industry also adds another barrier to market entry – all of the good spots for hydro generation are already taken and the areas where wind and geothermal a practical solution are limited.

    The barrier to entry in the New Zealand generator market is also raised due to our small population and current flat demand for power – there is no need for a new power plant, even if a new company wanted to enter the market by building one. This will change over time, and at some point we will need new generators but once the new station is built we are likely to find ourselves in a similar position as we do now.

    Multiple stations owned by multiple business entities creates a large amount of duplication in regards to management and strategic planning. You also run into issues like what occurred with Meridian and Genesis where we had hydro stations in the chained Waitaki scheme owned by different operators “competing” against each other – in that case there is a the risk that the company in charge of an upper station will starve off the water supply to the lower stations that are run by the competitor.

    I’m glad we can agree that your economic textbook and/or dictionary says the same thing as wikipedia, as the major generating stations (and the electricity grid that they are a part of) fit this definition perfectly. I’m pretty sure that just because you find it easier to comprehend different companies running different generators than you do different companies running different transmission grids doesn’t mean that electricity generation in NZ is not a natural monopoly.

    We are talking about electricity generation and distribution in a New Zealand context, not in your several unnamed first world countries. In the context of New Zealand, our generators were created by a single producer (the government using taxpayer dollars) and then, after 30+ years of operating under a single operator (the NZED) this collection of plant had a pseudo-market model artificially imposed on it. These companies did not spring naturally out of a competitive market, if they had I would not be arguing that electricity generation in New Zealand is a natural monopoly.

    Keen to hear how you think NZ power generation can bound by these factors yet somehow not be a natural monopoly – which, by the way, would appear to be anything but a “technical term” and is in fact a somewhat blurry concept that involves multiple factors unique to the industry under discussion.

    P.S. I tried to post the links but wordpress didn’t like it so you get what you get. They are all direct quotes taken from sites that return in the first page of google results for “natural monopoly”. I’m sure you’re smart enough to operate google so you can go and find them yourself.

    P.P.S. Antoine, disagree all you like – it only further exposes you as a blinkered ideologue masquerading as a pragmatist.

    Comment by Rob — March 11, 2013 @ 8:52 pm

  67. Rob – If I understand correctly, our generators did not spring out of a competitive market because it was illegal – the State essentailly had a monopoly on generation, transmission and distribution until the Electricity Act 1968 was superseded in 1992.

    I’m sure Mr. Geddis could put me right if I got that wrong though.

    Comment by Gregor W — March 11, 2013 @ 9:24 pm

  68. That may be the case, however it doesn’t materially change the position NZ finds itself in today.

    Comment by Rob — March 11, 2013 @ 9:34 pm

  69. >all youse smartypants cunts trying to nitpick

    Definitional debate is seldom worth the effort. The important question is whether it will end up monopolized, and whether it is actually more efficient to power consumers as a private enterprise. To me, the mere chance of monopolization by private interests is a serious reason not to do it, since this kind of thing can be done without formal agreement, an oligarchic monopolization in which the players set their prices together, whether in secret or just because they can get away with being a partition of rorters. Is it more efficient in private hands? I’ve never seen any real evidence of this at all. The only reason left to make the sale is for the money, to give the government accounts a chance to do something else with the capital. Nothing at all has been clearly marked as the reason for this sale. NOTHING. There is no public debate about what the money will be used for to justify losing a profit making enterprise that is crucial to our sovereignty. This is lining up to be a disastrous repeat of past mistakes. The population doesn’t want it. It’s fucked up at every level.

    Comment by Ben Wilson — March 11, 2013 @ 10:31 pm

  70. It’s a “gateway asset sale”, IMHO.

    Comment by Ben Wilson — March 11, 2013 @ 10:53 pm

  71. I had started to get the feeling as if the debate was being deliberately derailed…

    My first post on this stated the financial aspects of the sales don’t stack up, and that the stuff the government was proposing to spend the proceeds on were shortsighted and stupid. Looking back over the thread of comments since then, no one has really attempted to dispute this, they’ve decided instead to increase the noise/signal ratio of discussion by focusing on some rubbish semantics.

    In the end it doesn’t really matter if who does and doesn’t accept whether NZ’s electricity generating sector is a natural monopoly or not – the forces and influences I have described are still present and I would think obvious to any outside observer.

    As Ben says above the major issues here are really whether it is wise to start handing over the control of infrastructure that is critical to economic activity to private interests and whether the sales make sense financially. It’s not and they don’t.

    Comment by Rob — March 11, 2013 @ 10:58 pm

  72. It amazes me that the rhetoric at election time was of selling this thing for 4 billion. Now it’s looking like 1 billion. When you’re electioneering with figures in the billions you really can just say any old shit. It’s small potatoes even in the annual budget of NZ. But that doesn’t mean it’s going to be small potatoes on my power bill in a few years time. Not to me, anyway.

    Comment by Ben Wilson — March 11, 2013 @ 11:30 pm

  73. Looking back over the thread of comments since then, no one has really attempted to dispute this…

    That because most commenting here are in violent agreement. The business case for sale doesn’t even remotely stack up.
    What people were opining on is your assertion that electricity generation was a natural monopoly, which is fair game.

    What will be fascinating to see in May is the IPO strike price for MRP.

    The govt has managed to engineer an almost impossible balancing act; ensuring that the price fits the rhetoric (“Shares for Mums and Dads! Up to 2000 heads per buyer!”) while maximising sale price, all without tipping the initial P/E ratio much beyond 10 (probably more like 7 if you look at US long-run historical energy utilities) and risking a price dump on the back of profit taking right out of the blocks.

    Comment by Gregor W — March 12, 2013 @ 10:32 am

  74. At the risk of sending the discussion spiralling downwards again into a unwinnable semantic shitfight, would you care to challenge my assertions in regards to the conditions which I consider qualifies NZ power generation as a natural monopoly?

    I’ve stated them over and over, but no one is addressing them and telling me why these factors don’t matter.

    It’s fair game for sure, but all I’ve seen so far is people telling me that I’m wrong without any real evidence to the contrary. Claiming a properly functioning market exists because we have five main companies (three of which are SOE’s) that were created out of thin air by governmental decree does not wash.

    Comment by Rob — March 12, 2013 @ 10:48 am

  75. “72.At the risk of sending the discussion spiralling downwards again into a unwinnable semantic shitfight, would you care to challenge my assertions in regards to the conditions which I consider qualifies NZ power generation as a natural monopoly?”
    Sorry Rob, you won the arguement with “cunt” and “go fuck yourself”, so I bow down to you. I’d somehow managed to miss that post of yours until Antoine referred to it. Matural Monopoly means whatever you want it to mean.
    For further info see this instructional economics video:

    Comment by Clunking Fist — March 12, 2013 @ 12:43 pm

  76. would you care to challenge my assertions in regards to the conditions which I consider qualifies NZ power generation as a natural monopoly?</I.

    Sure.

    (i) while hydro generation as a subset might be considered a natural monopoly by virtue of geographic circumstances and regulatory history (there are only so many lakes and they've already been built on under the historical government monopoly of energy works) there are potential alternatives to hydro generation across the sector (i.e. modern coal / gas plants near Southland lignite).

    (ii) while capital intensive infrastructure precludes some player from entering the market (i.e. you and me), no particular major player precludes any other major player from increasing their output capacity purely on an cost-benefit basis by virtue of advantageous diminishing returns (i.e. it doesn't matter which company builds any given plant – there are no inherent capital efficiency). If such advantage existed, we would likely have seen a consolidation of the SOEs as the government as shareholder, sought internal efficiencies from their investment.

    (iii while demand will outstrip supply according to MED projections, energy security will be bolstered by diversification (i.e. 100PJs of geotherm to come online over the next decade as opposed to 5PJs of hydro according). Supply outstripping demand indicates that that the major players still think there is money to be made even in times of potential market surplus, indicating conditions of natural monopoly probably don't exist – either that or across the board, they are all chasing after diminishing returns which would seem counter-intuitive.

    (iii) for non capital intensive localised generation (watermill / windmill / solar at my house) there is (since 1992) no significant barrier to entry for generation or surplus wholesale energy transmission back onto the distribution grid. There is however a barrier to entry in the form of natural monopoly on the distribution network for retail purposes (i.e. I can't elect to sell electricity to my neighbour 3 doors down without creating my own distribution infrastructure).

    Claiming a properly functioning market exists….

    Nobody is making that claim.

    Comment by Gregor W — March 12, 2013 @ 1:56 pm

  77. apols for italics fail

    Comment by Gregor W — March 12, 2013 @ 1:56 pm

  78. I quite like the diversionary discussion here.

    The generators are too a natural monopoly. There’s no market in the classic sense, pricing and plants are strictly regulated to match the production scheme of the former state monopoly, only with higher prices to better tax the public by stealth. You turn that regulation off and there’s rolling blackouts for everyone within the year, because that’s even more profit. No one can actually build enough power generation to cope with any of them playing funny buggers with supply (as one attempted to do by tearing down an emergency generator a few years back).

    As for the shares, it’ll depend what they set the total price at. Trustpower and Contact dropped a long way initially and took 5-7 years to come good (or immediately if you bought in after the drop). China’s not interested in New Zealand’s electricity, but the Aussie retirement fund managers will be, so long term you’re golden, if you’re still planning to be alive in 10+ years and no one invents free electricity. Maybe not Genesis, even though they’re the best of the lot right now with Huntly being such rich pickings (and very prone to abusive market manipulation).

    As a side note, paying your electricity bill with the returns on this will likely set you back around $20k+, for which price you could have a top end grid-tied solar & battery scheme installed that did the same and a nice holiday in Europe too. Putting in bats, fixing drafts, and generally maintaining your house are vastly better returns.

    Comment by tussock — March 13, 2013 @ 5:12 am

  79. The generators are too a natural monopoly.

    Multiple sellers, multiple points and forms of generating a ‘product’, a wholesale trading market with visible pricing of spot and forward contracts. Sure, that’s EXACTLY what a monopoly looks like.

    Comment by Phil — March 14, 2013 @ 2:04 pm

  80. Mmmm, it may look like an open market but it ain’t EXACTLY that open.

    Comment by Tim — March 14, 2013 @ 6:04 pm

  81. @Phil, yes, that is what monopolies look like. What are you imagining? You still have to sell your products, it’s just there’s no real market forces any more and you can gobble up a bunch of money for nothing. Like the power companies do right now, the bullshit lines fees with the telcos, what the supermarkets do to small suppliers and their fake sales, the Banks did with fees until Kiwibank turned up.

    In this case, electricity has seen a 5.2% average increase of power prices per annum since 1990, vs 2.3% average CPI inflation. So an 88% increase in real terms. That’s how monopolies operate, we’re the frog in the pot, and they’re cooking us.

    As we’ve seen in the news the last few days, the scam is you jack up asset values (based on future income) and then jack up prices for a bigger profit (based on asset values), which you’ll note is not a terminating loop. The petrol companies run the same scam with their “reasonable profits”. Not to mention every time the book value rises you issue more bonds and pay that out as a profit too.

    Comment by tussock — March 14, 2013 @ 7:49 pm

  82. Tussock – don’t confuse effective monopoly with natural monopoly.

    The effective monopoly in NZ (ex Contact) has been created by the State as the sole shareholder of about 80% of NZs power generation and 100% of NZs on grid transmission.

    Thought experiment: if the State via legislation owned 100% of grazing land in NZ and hence cornered the wholesale fresh meat creation market, would this constitute a natural monopoly?

    Comment by Gregor W — March 14, 2013 @ 8:30 pm

  83. Semantics. If it charges like a monopoly….

    Comment by teemotay@gmail.com — March 14, 2013 @ 8:57 pm

  84. >Thought experiment: if the State via legislation owned 100% of grazing land in NZ and hence cornered the wholesale fresh meat creation market, would this constitute a natural monopoly?

    Well they’d definitely finally have absolute power over the bullshit.

    Comment by Ben Wilson — March 15, 2013 @ 4:34 pm

  85. Yes, Gregor. The natural monopoly is where the Clyde dam is very expensive to build, impossible to duplicate, and can’t be undercut for prices, ever. See also ideal wind farm sites, where White Hill already has turbines on it. Even handy cooling for Coal plants near Auckland is physically limited, and it’s not like it’s economic to build a 2nd Huntly. Phil was trying to suggest monopolies didn’t use standard markets, when of course they all do, because literally fixing prices is illegal unless you’re Fonterra. Different argument.

    Comment by tussock — March 15, 2013 @ 11:07 pm

  86. We’ll agree to disagree, tussock.

    While another Clyde dam might be impractical to duplicate – essentially because there aren’t many rivers left to dam – what stops another market entrant building an equivalent generation facility (nuclear for example) is legislation, not ROI.

    If cost benefit was the issue, then the price of electricity wouldn’t have gone up 88% since 1990, as natural monopoly (as opposed to one supported by legislation) must exhibit a barrier to entry based on one firm having a lower long-run average cost than any other player.

    What the NZ power industry exhibits is an effective government monopoly based on common ownership (a cartel) dressed up to look like a functional market. It’s actually worse than a market monopoly because there is no benefit in the state regulating it’s own operations while it can continue to gouge the consummer to increase the effective tax take.

    Comment by Gregor W — March 16, 2013 @ 11:18 am


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