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Cartels - do as we say...?

12 April 2021

Many years ago the NZ government changed the electricity industry.

As I understand it, prior to this change the industry was basically run by government for the benefit of the citizens of the nation.

Of course, as we all know by bitter experience, government-run industries can be incredibly inefficient and prone to waste. Anyone who remembers the days when you had to wait to get a telephone installed and could only speed up the process by providing copious quantities of beer in an informal transaction will understand how that worked.

There was a belief, back in the day, that the electricity generation industry was pretty much suffering from similar woes and thus, the government of the day, decided to "fix that".

As a result we've (apparently) ended up with competition in the generation marketplace and that, we were promised, would lead to lower prices and better value for consumers.

Did that happen?

Lots of people don't think so. It seems that the politicians were lying (as is bound to happen once their lips start moving).

We now have five major power generation companies but I really don't see a hell of a lot of competition in the marketplace in terms of price and value. One could almost be forgiven for thinking that those five companies have formed an oligopoly that is acting like a cartel.

Of course that would *never* happen because, as the government has recently made clear, it has no tolerance of cartels.

Indeed, as of last week, operating or being part of a cartel is now a criminal offense with some pretty hefty penalties.

Will the government investigate the power generation oligopoly for cartel-like practices?

Of course not.

Why not?

Well perhaps because the NZ government still holds 51% ownership of two of the three largest players in the generation market. Meridian, Genesis and Mercury are effectively SOEs whilst Contact and Trustpower are the only truly publicly traded players.

Given that the government extracts some pretty healthy revenues from its majority shareholding of the big-three, it would be most unlikely that our politicians would actually engage in a totally objective review of their pricing policies and the potential for price-fixing. Why would they wish to shoot themselves in the foot and risk criminal prosecution under their own (new) legislation?

Maybe this explains why NZ's power prices are so much higher than those seen in other countries, despite our privileged position of using many generation assets that have already been paid for by previous generations and which do not require expensive fossil fuels to operate. How unusual it is that although water, wind and sun are effectively "free", we pay more than many countries which rely on coal, oil and gas for their electricity generation.

Of course it could be claimed that generation is only half the story and that the retailers are also part of that pricing structure. Whilst this is true, it should also be remembered that the oligopoly of generators all have their own retail arms so fixing could be an issue even at this level.

Also, although there is competition at the retail level, the generators have a monopoly over the supply of electricity so there would be great incentive for all retailers to agree on relatively similar pricing, forced by the wholesale tariffs.

I wonder how many private-industry groups will fall foul of the new cartel laws whilst perhaps government itself smiles from a defacto position of immunity.

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