Electricity. Issue of the Week?

Keith Rankin, 7 July 1998


While rumours abound that New Zealand is entering a recession or a depression, our parliament was, last week, locked into "urgency" on the electricity reform legislation. (This week, Parliament is in recess, due to the school holidays.) No doubt if an asteroid was aiming for Cook Straight, the government would wait until the ideologically-driven legislation was passed before debating the more immediate matter.

I noticed a group of interesting electricity stories in the press last week, none of them prominent or subject to much debate. They all raise interesting, indeed important, conceptual issues of political economy.

An article in the Sunday Star-Times (28 June, p.D3) headed "Benefits for all seen in energy merger", describes plans for a merger between South Island electricity retailers Southpower and United Electricity and predominant gas retailer, Enerco. This all seems somewhat ironic that competition between electricity and gas is being removed just as electricity generation and distribution is being divvied up, ostensibly on behalf of the same goal of more competition and hence more consumer surpluses. According to the Herald's Brian Fallow (4 July, "Taxman could have the last say on electricity", p.E1) both Enerco and Southpower have monopoly cultures, with "the latter the only power company taken to court by the Commerce Commission for anti-competitive behaviour".

One problem with the "microeconomic reform" process that is taking place at present is that it is predicated on the belief that all specific commodities (such as electricity) are stand-alone products, and that there must be a competitive market for each specific commodity.

In reality, electricity competes with gas, coal and wood as sources of energy, especially for home use. It is the competition within the energy sector that matters, not that within the electricity sector. Actually, it's not even that simple, because insulation and other energy-saving products, for example, sell in competition with energy products. Furthermore, changing lifestyles may mean that products not relating to energy use may be competing for the same dollars of New Zealanders' incomes.

There always was ample competition in the energy market. If the collaboration between electricity and gas is a result of the reforms being pushed through Parliament, then we may get a new artificial competition between regionally located electricity suppliers replacing a real source of competition; that between electricity and gas.

In another story, "Price slide savages Mercury" (NZ Herald, 1 July, p.E1), we learn that the Auckland power failures this summer were not the only reason why I and all other owners of Auckland's electricity retailer have not received a dividend this year. Apparently, "Mercury Energy has written off its investment in a $70 million power plant that was completed only a year ago. The value of the 51 percent stake in the McLachlan geothermal station near Rotorua has been savaged by declining power prices."

We have heard for many years now, about the failures of the "Think Big" energy project strategy implemented by Sir Robert Muldoon and Bill Birch in the early 1980s. One obvious failure of Think Big was the Marsden B Power Station which was never commissioned. Even having written off the capital costs of Marsden B, it still wasn't worth using because of its very high running costs. Well it seems that fully commercial companies, fully wedded to the profit motive, make just the same mistakes. Indeed, the Think Big mistakes were more excusable, given that the future of the market for energy products was much more difficult to read in the late 1970s than it has been in the 1990s.

In a third article "Reforms throw up tax problems" (NZ Herald, 1 July, p.E3), we learn that: "As the Inland Revenue Department interprets existing tax law, when a power company sells its lines or, more likely, its energy retailing and generation assets, if it then wants to pass the proceeds on to its owners the proceeds will be taxed at 33c in the dollar. ... Because their shares were not issued for cash, a distribution they make on selling their energy businesses cannot be regarded as a return on capital and would be taxed."

It appears that public property (ie all economic assets not in private ownership) - commercial property as well as public domain assets (see "Selling Public Assets") - is regarded, legally, as having no owner. Hence a capital payment on sale of such property is deemed as income rather than wealth. (Presumably, then, the proceeds of a sale of the Auckland Regional Services Trust assets leading to a public cash distribution would have been regarded as taxable income, a neat way for the Government to simply take 33% of the value of a disestablished ARST.)

This ruling, nonsense to an economist, shows that there is much work to be done in properly defining public property rights, at the local, national and international level. There is a real problem which can only be resolved by the proper recognition of public property rights. Private capitalists, who have a real interest in leaving public property issues under the carpet (where they have been through most of this century; a century that has focussed far too much on labour as the predominant source of personal income), can be expected to obstruct practical developments in the economic theory of public property ownership.

The fourth article, "Cold comfort for power users in court decision" (NZ Herald, 1 July, p.E10). It says: "The High Court has ruled that electricity is neither a 'good' nor a 'service' as defined in the Consumer Guarantees Act, so the supply of electricity falls outside the statute."

This problem is perhaps more a problem of poor drafting of legislation. It is conventional for economists to use the term "goods and services" as a single entity, meaning "commodities"; especially commodities for "final consumption". The term "goods and services" is generally a way of placing the emphasis away from goods for "intermediate consumption" (eg raw materials) which is the popular use of the word "commodity".

A commodity is any generic item that is bought and sold in a market. Electricity is, without any ambiguity, a commodity. Hence, while possibly neither a "good" nor a "service", it nevertheless falls within the rubric of "goods and services".

Again, this case shows that judicial ignorance of both economic principles and the language of economic discourse plays into the hands of those who are have the financial means to exploit the pedantry that characterises much of our legal system. In this case, it is ordinary electricity consumers who find themselves unprotected, to the advantage of the electricity supply industry.

This last case could be tested further, as a Herald reader (Trevor Norton) noted in a letter on July 4:

A member of the Judiciary has ruled that electricity is neither "goods" nor "services". If this ruling is upheld, there are two questions to ask. Why are we paying goods and services tax on this item; and to whom do we apply for a full refund of the taxes paid?
   A refund of the tax paid since GST was introduced could bring a windfall even greater than the recent AMP giveaway, but I have my gut feeling that I shouldn't hold my breath.


PS. Other items relating to the Electricity "Reforms" are:
  To Split or to Combine?    (23 June)
  On Breaking-Up Electricorp    (10 June)


© 1998

Rankin File | 1998 titles