Hi Max,

My only view was that we can’t conclusively blame Labour for anything – with hindsight, and finalised data, we may be able to lay some blame on them – but not right now.

Now, from a quick look at the CPI numbers, it appears that the recent spike was substantively bigger than the late 90’s spike. Furthermore, neither spike is as big as the spike during 2004. However, there are alternative hypotheses that don’t involve blaming Labour:

1) There was relatively greater capacity during the late-90’s – and as a result, we were more able to accommodate a shock. If this is the case we have to ask – who is to blame for the lack of investment. Some people could put this down to the opening up of an industry that may be a natural monopoly.

2) Population growth (and/or income growth) is a major determinant of prices – as it drives short-term demand growth when capacity growth is fixed. In this case a spike in 03/04 makes sense – and the fall in 1999/00 makes sense – without having to appeal to the policies of either party.

As I said, I am not an expert on this – but I just don’t see the case against Labour as conclusive. Remember, my hypothesis is just that it might not be all Labour’s fault – I am not trying to blame anyone for what has happened. When you blame Labour the burden of proof is actually on your shoulders.

I’m sorry but the facts don’t support your view. The trend down in retail (as compared to wholesale) prices over the period I referred to had nothing to do with the lack of a drought. If you doubt me, examine the statistics for the period. Retail prices fell because of competition, and increased efficiency brought on by the threat of competition. Yes, long run prices will trend towards the highest cost marginal generation installed, but effective competition will ameliorate the ability of generators to pass on the costs. That shows in the much slower trend rise for wholesale prices as compared to retail prices.

Labour does have to bear the responsibility for a lack of competition from 2002 onwards. They took the competitive pressure off the gentailers by allowing vertical integration between generation and retail marketing to take place; they didn’t promote or mandate smart metering to give consumers more control over their electricity pricing (by giving consumers real time information and therefore the ability to choose amongst available retailers); they inserted the Electricity Commission into the marketplace which slowed the building of new generation and transmission capacity which enabled the electricity companies to price close to what the market would bear; and they put demands for excess dividend payments on the SOEs which fed into higher prices to consumers. These were some of the reasons why your analysis is wanting.

The issue isn’t as simple as static prices methinks – the big issue for electricity generation is long-run prices, and this depends strongly on investment.

Ultimately, we want the investment made by power companies to represent the social benefit of the investment – but it isn’t clear that this is what we will get either in a regulated or deregulated environment. We can’t clearly state that the deregulation of the industry has been a success or failure at the moment – and I don’t think we can currently lay blame on either of the parties.

Also Max, the decline you discussed occurred as we came out of a drought, while some of the increase occurred when we entered a drought. As NZ is so reliant on hydro power, droughts have a huge impact on the price of electricity – as a result, it isn’t entirely clear to me that the criticism of Labour is fair in this case.

So deregulation did lead to lower power prices. It was only Labour’s reregulation and their madate to install high priced renewable energy generation that caused them to surge.

You can’t blame National for this, let alone me.

Max Bradford
Former Minister of Energy

Govt seems to be all over the place on regulatory issues yet ulitmately it is in their interests to back them as they provide a safety valve for when things go wrong politically. Today you’ve got Key saying power prices won’t rise if SOEs have to improve returns. Bollix they won’t. That may come back to bite him just like Max BRadford’s comments about prices dropping with deregulation.

Opening the regulators up to challenge means opening the door to aggressive lobbying on anything and everything which has got to be a distraction.

Sad day.