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At a Fabian meeting in Wellington on Tuesday 16th April, Dr Geoff Bertram presented an overview of the relationship between asset values and regulation. Geoff's full presentation is in the Resources section of the website. He provides a theoretical overview of the way how these relate, and some evidence of the profit and pricing outcomes with particular reference to New Zealand's electricity gentailers and Wellington Airport. Topical and relevant.

Other papers on the same topic by Geoff and by Peter harris, Jim Turner and Dick Werry are also relevant.

Peter Harris, former member of the Electricity Commission, Jim Turner Policy Analyst, and Dick Werry, former chair of the Utilities Committee of the Greater Wellington Regional Council compared outcomes from the privatised electricity network and the publicly-owned bulk water distribution network at a recent seminar in Wellington.

The differences are striking and significant as the Government is pressing ahead with its privatisation of the New Zealand's electricity generation under its mixed-ownership model.

Wellington region's water distribution network is still in public ownership. The region's electricity distribution network was privatised in 1990. The two networks cover the same area and both distribute an essential service. In 1990 the asset value of the water network was $168million and the cost of distributing water was $22.2million; the asset value of the electricity network was $180million and the cost of electricity distribution was $36million. In 2010 the water distribution cost rose to $26.1million, a 17.5% increase. Privatised electricity distribution cost $142.5million, a 295% increase.

 

Why the difference? The answer is in the capital gain, and the required return on appreciated assets.

 

50% of Capital Power was sold to TransAlta in 1992 for $120million and the other half in 1996 for $90million. In 2000, TransAlta sold to Kansas banking group United Networks for $560million, making a handsome (and tax-free) capital gain. In 2004, United Networks sold to New Zealand company Vector for $800million, another substantial tax-free capital gain. In 2008 Vector sold the network to its current owner, a New Zealand registered subsidiary of Chinese company Cheung Kong Infrastructure Holdings Limited, for $785million.

 

You can read more here.

 

Brian Easton introduced this Fabian series in Wellington on Monday 10 September. The theory of light-handed regulation, "the notion  that the market can be left to self-regulation by private intersts with a minimum of public regulation throug law and supervision" that took hold in the 1990s was based on absolute faith in markets, coupled with an expectation that reputational threat, the possibility of damages, or faith in the moral behaviour of business would ensure that business behaved responsibly.

It often takes time before the effects of irresponsible behaviour surface, and the consequences may be very serious. Brian Easton give several examples of where this faith has been misplaced, and the result has been financial loss, accident and death. He argues that while the list is selective "we need to see the regularities across a wide range of instances and address the mindset of light-handed regulation," and offers some principles that may set a context for regulating an economy.

Brian's paper may be found in the the Papers and Presentations section of the site. Further seminars in Wellington will cover work safety, finance sector, energy sector and building and construction. Details are in the Upcoming Events section.

This was the theme of Rod Oram's article in last Sunday's Sunday Star-Times. It begins:

THE BATTLE to establish progressive new economies against the entrenched forces of regressive old ones has taken a critical turn on both sides of the Tasman over the past fortnight.

In New Zealand, the Reserve Bank and the Labour Party have turned against the prevailing orthodoxy of monetary policy. Their overriding goal remains the control of inflation. But they both say they are seeking new policy tools to mitigate the adverse effects caused by a slavish application of a single tool – interest rates.

If they succeed, we could get lower interest rates and a less volatile exchange rate. Then, hopefully, we could rebalance the economy away from debt and consumption to investment and earnings, particularly from exports and from investment in businesses overseas.

The Fabians get a mention too:

Selwyn Pellet, a leading high tech entrepreneur, Ganesh Nana, chief economist of Berl, the economic consultancy, and this columnist joined Walley in a three-city speaking tour on the subject earlier this year organised by the Fabian Society.

Given the new understanding growing overseas about the need to better manage fiscal misalignments in order to promote greater economic stability, plus the shift at home by the Reserve Bank and the Labour Party, monetary policy could become a defining issue at the next election. It deserves to be. It separates the architects of a more stable, higher value, investment and export-led economy from the defenders of the old boom-bust commodity economy.

You can read the full article here:

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