Thursday 23 July 2009

Should Meridian be Privatised?

This story in yesterday’s Press suggested that the SOE, Meridian Energy, is being restructured in preparation for being privatised after the next election, although this has been denied by John Key.

The reaction of the regular “public finance” economist in me to the suggestion that an electricity company will be privatised is to cheer loudly: the government has no business owning shares in companies providing private goods while at the same time maintaining a large portfolio of debt. The “public choice” economist in me, however, hopes that Meridian and the other two SOE electricity generators (Mighty River Power and Genesis) will remain government owned.

The reason for this is that electricity politics is fraught in New Zealand. Economic efficiency requires that consumers pay the marginal cost of the most expensive unit of electricity produced, which will imply very large profits for owners of hydro power stations where the first units of electricity are very cheap to produce. And, unless we want to return to silly policies of the past in which the country wasted huge amounts of money building power stations whose only role is to supply electricity in very dry years, we will want customers to face higher prices in dry years in order to ration demand to available supply.

In New Zealand voters have a historical expectation that it is the government’s job to deliver them cheap power, with no blackouts, at the same price no matter how full are the southern lakes. In this environment, fluctuating power prices with high associated profits to the generators in dry years would only be politically sustainable if those high profits represent a dividend to the crown rather than to private interests. Yes, those high expected profits would be amortised into the price that the government would be able to sell Meridian and the other companies for, so that taxpayers would be enjoying the profits each year in the form of lower interest payments on the national debt, but this is not the popular perception.


  1. Hmm. Seamus: if the status quo were government-run supermarkets, would you argue against privatization of food delivery on the grounds that voters would never accept "profiteering" on food and so grocery stores could never charge market-clearing prices on vegetables during winter if they were privately run?

  2. Eric,

    The answer is that if the government-run supermarkets were run as profit maximising SOEs, one of the major incumbants in the supermarket industry were already privately owned, there were no legislative barriers to entry by other private supermarkets, and if looking around the world, the norm was private ownership with heavy (and badly designed) regulatory constraints, then yes, I would argue against privatisation of food delivery.

    The current NZ set-up for electricity generation is so much better than the overseas norm, I think we tamper with it at our peril.

  3. I've had a look at the preference data. No way that private and unregulated is a stable equilibrium. New post above.

  4. Hey Seamus, to be honest I don't understand a single thing you write in this blog just like I never understood a single thing you said in class, but you're the funniest lecturer I've ever had : )