Debate on Crown Entities, Public Organisations, and State Enterprises — Meridian Energy Ltd

Meridian Energy is one of the three State-owned power generators and is subject to some very similar issues to those debated in the Genesis Power debate. I refer back to the previous Government speaker, Gerry Brownlee, who said in respect of the Government’s privatisation policy that it would tell voters before the election what it was going to do to them. That would be lovely, except that National did not do that last time. What John Key told the voters last time in respect of one State-owned enterprise—Kiwibank—was that a National Government would never ever sell Kiwibank. National said that it would not raise GST, and it said the vast majority of Kiwis would be better off after the Budget. But of course the majority is not, because the Government forgot to include the rate of inflation in the calculator, and that has left average Kiwis $30 to $50 a week worse off, even before we take into account other increased costs like those for early childhood care.

The point is that nobody believes this National Government any more. No, a small minority does. But 53 percent of New Zealanders, when polled recently, said they would not believe any commitment that the Prime Minister might give on State-owned enterprises like Meridian Energy. They believe he will change his mind—again. And which Prime Minister is it: the one who will never ever sell, or the one who is dressing up to bring something to the electorate before the election? It is what we expect from this Prime Minister on this subject. This is the same Prime Minister who says Ministers are no longer responsible to him for their behaviour under the Cabinet Manual or for their behaviour under the Standing Orders of the House. So as recently as today we saw the extraordinary spectacle of an Attorney-General who, once again, has been caught out for not giving a full and complete declaration on pecuniary interests. That is a sham but is exactly what we would expect from this Government.

In respect of Meridian Energy, as a major energy generator it is absolutely, intimately tied up with the nature of the rules under the Electricity Industry Bill, which is soon to be dealt with in Parliament. The Max Bradford reforms of the 1980s were a complete disaster. They were supposed to drive down the long-run price path for electricity. Instead, it rose—at least it rose for residential consumers. It went down, of course, for major industrials like the Tīwai Point smelter. It went up for mum and dad consumers like the old lady across the road from my electorate office, who told me that in the first week after the Budget she had found that the rise in her power price more than ate up anything that she was going to get out of superannuation. It more than ate it up. She is typical of New Zealanders up and down the country, who are shivering in their cold and musty flats because they cannot afford power.

New Zealanders cannot afford power because, amongst other things, this Minister has told companies like Meridian Energy that they must improve their financial performance. Well, let us think about that. Meridian Energy, as a generator, has a bunch of dams, and it has power lines running from the dams. It cannot do much other than turn the tap on and off, or raise the price. So when the Minister was challenged in front of the Commerce Committee about why he had failed to ask the generators not to raise electricity prices, the best that this Minister could say was that pricing was a blunt instrument. We know it is a blunt instrument, but why has the Minister not lifted a finger to protect New Zealanders from rampant power increases? Why is he condoning increases above the rate of inflation and above the impact of the emissions trading scheme? The reason is that there is a quiet wink and a nudge with the Minister of Finance that the Government could use the dough. That is the bottom line. I tell the Minister that it is within his power as the Minister for State Owned Enterprises simply to issue a directive under the State-Owned Enterprises Act that would forbid Meridian Energy or Genesis Power from raising prices faster than—take your pick—the general consumer price index, the effect of the emissions trading scheme, or that plus 5 percent. You name it! The point is the Government has not lifted a finger to protect ordinary New Zealanders from rampant power price increases.

Ah, well, we come to part two of the story. What might be the medium-term solution? The Government would say it is to privatise the State-owned generators, because doing that will keep prices down. Yeah, right! The Government would privatise them so that the boys in Merrill Lynch—the Prime Minister’s old firm—can make a quiet killing on the transaction. What would the effects of privatising Meridian Energy have been if it was privatised 5 years ago? Under the previous Government, Meridian Energy invested in certain assets in Australia, particularly in Southern Hydro. It made a cool billion dollars profit off those transactions, which it returned to the taxpayer. That profit was returned to the Crown in the form of a couple of big cheques when we did the last long-term hold review, because Meridian Energy said it should not be its own bank. We said no, it should not. We said that money belonged to the taxpayer, so Meridian Energy should return the capital. It did that.

Now, let us imagine what would have happened if Meridian Energy had been privatised. It would have returned the profits all right—but to its private shareholders. It would not have gone into the “People’s Bank” or the consolidated account. It would not have been offset against taxes; it would have simply been somebody else’s dividend cheque. We have heard enough of the sham of saying mum and dad Kiwis should not be prevented from buying a few shares in Kiwibank—in something that they already own. Why would mum and dad Kiwis pay twice? They have already paid for Meridian Energy through their taxes, and that is why they are already entitled to the dividends—like the billion dollars from Southern Hydro. Meridian Energy is a prime example of an asset that should not be sold.

Let us move on to the next little story that the Minister has been spinning. He said to the Finance and Expenditure Committee that the performance of our State-owned enterprises has been terrible, which was in direct contravention of the previous speaker, Mr Brownlee, who said the performance of the State-owned enterprises has been just fine. Of course, Mr Power was not above quoting the annual results at the depths of the recession last year, rather than taking a long-run average, because if he had done so, he would have found that the performance of the State-owned enterprise portfolio is within a couple of hundredths of a percentage point of the performance of the NZX50—that is, apples with apples, horses for courses, State-owned enterprises are just as good as private businesses already. But admitting that would not suit National’s ideology, would it? It would not suit National’s mantra that the only way to get performance is to privatise. That is simply not true; there is simply no evidence for that. It is perfectly possible for companies that are State-owned to perform well. National should ask Air New Zealand about that. Air New Zealand has performed well as a Crown entity under State ownership. So has Meridian Energy; so has Genesis Power. The Minister knows very well that Air New Zealand is largely Crown-owned and would have been sold to the knackers yard, had the previous Minister of Finance not intervened.

Of course, the one to take the cake, if the public has any doubt about these issues, is Kiwibank. It is no wonder that 85 percent of New Zealanders want to retain Kiwibank. They know we have a terrible savings deficit, they know we are bleeding red on our international accounts, they know very well we have to make our financial sector stronger in the interests of all New Zealanders, and they know that Kiwibank is a critical strategic piece on the chessboard. So what does that lot of clowns want to do? The National members want to flog Kiwibank off, supposedly to mum and dad Kiwis, knowing very well that it will end up in the hands of its Australian competitors. That is a shame. National should be building up the New Zealand financial sector, not selling it to the wolves—not selling it to the wolves. I ask why Bill English and John Key cannot agree on this matter. I ask why it is that John Key says “never, ever, ever” and Bill English comes out the day after the Budget was released and says “What about selling Kiwibank?”.

💬 Hon Steve Chadwick: Because they don’t talk to each other.

Yeah, maybe they do not take tea together. I suspect that might be true. After all, who changed his vote in the last leadership run? It is absolutely unconscionable—

💬 Hon Trevor Mallard: It was actually the one before.

Yes, it was the one before. Well, we do not know; “Slippery Key” might have changed his vote two or three times. I would not be at all surprised if he had.

Kiwibank must not be sold. It is not in New Zealand’s interests to sell Kiwibank, just as it is not in New Zealand’s interest to sell Meridian Energy, Genesis, or Mighty River Power, because those are crucial, strategic, monopoly assets in New Zealand. It is a sham that the electricity bill that is to come before this House contains no measures more stringent than simply shuffling a few of the deckchairs on those boats. The Government is simply swapping a power station between a couple of the generators and calling that structural reform. That is absolute bollocks; it is codswallop. The Government really needs to provide a decent regulatory framework that would unmask and deal to the problems identified in the Wolak report.

We are nearly halfway through a debate on some of the State-owned enterprise matters in this financial review estimates debate, so I thought I would take a call at the midway point on the broader range of State-owned enterprises that have been selected by members for debate this afternoon.

💬 Hon David Cunliffe: Stung out of his slumber.

Well, if that last contribution was the result of a Harvard education, I think we have all got problems. The shareholding Ministers are custodians of around $25 billion of investment by taxpayers and State-owned enterprises. Members might be interested to know that this represents slightly more than 20 percent of the net worth of the Crown. Additionally, State-owned enterprises hold almost $47 billion in assets. In the 2009 financial year they paid about $647.6 million in dividends, which included a $150 million special dividend from both Meridian and Mighty River Power.

The responsibility of shareholding Ministers is to ensure that this investment, the $25 billion, effectively delivers an appropriate return. As the member who has just resumed his seat, David Cunliffe, asserted correctly with regard to the facts, recent returns—returns prior to this financial year—have been unsatisfactory, although, as Minister Brownlee pointed out, they are now starting to improve. For the whole State-owned enterprises portfolio there was an annualised return on equity of 1.5 percent for the 6 months ended 31 December 2008. This increased to 4.4 percent for the 6 months ended December 2009. However, the shareholding Ministers are firmly of the view that there is still plenty of room for improvement, and we will be continuing, along with officials, to work with State-owned enterprises during the current business planning round to develop appropriate performance expectations.

The shareholding Ministers will be looking at a range of measures in terms of performance. To this end, Ministers have asked officials to establish a range of financial performance indicators to be used across the portfolio, covering shareholder returns, profitability and efficiency, leverage, and solvency. These indicators have now been agreed, following consultation with State-owned enterprises, and should be included in each of the companies’ 2010-11 statements of corporate intent. Shareholding Ministers will also use the current business planning round as an opportunity to discuss capital structure and dividend expectations.

💬 Hon Trevor Mallard: They’ve always looked at all of those anyway.

No, they did not, actually. Disturbingly, they did not, I say to Mr Mallard. The money invested in State-owned enterprises is taxpayers’ cash; it is not money that necessarily belongs to State-owned enterprises. That provides an incentive to see money returned to the Crown as a dividend. Of course, those discussions as to whether money should be reinvested in the State-owned enterprises or returned to Ministers by way of dividend go on as part of that business planning round.

The issue that the member who was previously on his feet raised about price rises deserves a quick comment before I resume my seat and allow the debate to continue. His Government had 9 years to implement his plan for dividends to be used to reduce power prices. Between 2000 and 2008 we saw increases of about 66 percent in those prices across the board. Over that period the Crown took $3.5 billion in dividends. I think it is a bit rich now for members opposite to give examples or advice about what this Government should be doing in that regard when those members had plenty of time to put their plan in place. Extracting performance is a very high priority for shareholding Ministers. We are making some progress, but there is much work still to be done.

I will speak on Meridian Energy. Meridian is a very high performing State-owned enterprise. I have always been impressed with the people I have dealt with at that organisation, with the work that they do, with their commitment, and with their professionalism. Meridian is the largest State-owned electricity generator in New Zealand. In total, its generation capacity is 2,600 megawatts, and it produces on average 30 percent of electricity in New Zealand. It has over 180,000 customers.

💬 Hon John Carter: How does the member know all this stuff?

Because I work with them. Meridian takes its responsibilities to New Zealand and to the environment very seriously. It owns, operates, and generates electricity from hydro stations on the Waitaki River in the South Island and at Lake Manapōuri in Fiordland National Park.

It is also an experienced developer of renewable energy projects. Indeed, it is the largest producer of renewable energy in New Zealand. It is to be commended for its professional response to the changes to electricity legislation, which will see them continuing as the predominant renewable energy generator, with concomitant responsibility in price path setting.

💬 Hon Trevor Mallard: Who wrote this?

It is in my handwriting. Meridian’s approach to long-term development is that it is committed to meeting its share of the growing electricity demands of New Zealanders. I believe that it is well in line to achieve this.

Let us turn to some of the comments that came from David Cunliffe. I ask where he has been for 9 years.

💬 Hon Trevor Mallard: That’s not in handwriting.

Indeed, I ask where Mr Mallard has been. The Government’s position on public assets is clear and unchanged. The National-led Government has made a very firm commitment to New Zealanders that there would be no asset sales in this term of office and that if that policy changes it will be clearly signalled and campaigned on for the 2011 election. I ask what Labour does not understand about that position. Shareholding Ministers have not asked for any work to be undertaken in this area.

💬 Hon Trevor Mallard: Oh!

No, they have not at this point. Anything beyond—[Interruption]; here we go—is pure speculation.

Mr Cunliffe spoke about pricing. Mr Goff had 9 years to implement his plan for dividends to be used to reduce power prices. What happened between 2000 and 2008? What happened when Labour was on this side of the House? Increases occurred at about 66 percent across the board, and the Crown took $3.5 billion in dividends. I can remember previously watching a Minister with responsibility for electricity, with a “wink wink, nudge nudge”, say that as the lakes were going down in the South Island—goodness me—the prices would soon be going up.

Pricing is an operational matter for State-owned enterprises to respond to. The dividends paid by State-owned enterprises have no impact on the prices they charge their customers.

💬 Hon Trevor Mallard: Rubbish! That is absolute nonsense.

Which comes first? State-owned enterprises set their prices to try to achieve a commercial return from their businesses. That is in keeping with the State-Owned Enterprises Act, which requires them to operate as successful businesses and to be as profitable and efficient as possible. The Government’s job as the shareholder of State-owned enterprises is to monitor their performance and get them working efficiently for the benefit of taxpayers. Every dollar of profit earned by a State-owned enterprise increases the Crown’s operating balance, and we are working on initiatives to improve financial performance, which include improving the commercial expertise of boards; setting clear expectations in relation to performance, including financial performance; and holding boards accountable for achieving those initiatives. Those are good, solid business practices; they are things that Governments do. That is what the previous Labour Government should have done but chose not to do. That Government missed its opportunity, and Labour is now being critical of the National-led Government for doing what should have been done while Labour was in power.

Let us have a look at the purposes of generation in the South Island. If we look at the upper half of the South Island—from North Canterbury to Marlborough, Nelson, Tasman, and the West Coast—we see that that region produces only 23 percent of the power it uses. There is a lack of South Island generation. Electricity demand in the South Island has grown significantly more than new generation developments. That has to change.

I will take a call on this debate, and start by complimenting the Minister in the chair, the Hon Simon Power. He has been relatively precise in this debate. I think that in his sartorial elegance he looks the part of Attorney-General already. It is good to hear someone who is beginning to get his head around some of the issues that face State-owned enterprises. I make it clear, as the previous Minister for State Owned Enterprises, that I know that these issues are not simple; the power pricing one is a classic one. I am the first to accept that probably right from 1999, or even from 1998, when some policy decisions were made by the Labour Party and then Labour Government, we did not get it right. My view is that when in late 1998 to early 1999 there was a signal of the privatisation of Contact Energy, the Labour Party then should have made it clear that we would reverse that move and bring it back into State ownership—we would have refunded the money to the people who had bought it—and then the policy issues about energy would have been a lot simpler. It is clear that most people know that the conflict between being a regulator and being an owner has been one that has bedevilled Governments of both sorts.

I want to make it clear that there are two ways of sorting that matter out. One of them is the way of National. Clearly, the energy companies, as the most valuable, are sitting at the top of the National Government’s sale list. Those companies form the group about which Mr Whitehead at the Finance and Expenditure Committee indicated that public perception testing was going on in relation to privatisation—and, you know, that is the right of the Government. It is the right of the Government to test public opinion as to whether the energy companies should be sold. But I am hopeful of getting Labour policy to a point where we make it clear that if at any stage there is any privatisation, then that will be reversed. People will have their money refunded, but we will get back to the point of having a coherent policy.

I think there is work to be done on energy policy, generally, as well as in the area of State-owned enterprises. As the Minister knows, I have some sympathy for the State-owned enterprises, and for the possibilities they have as businesses that need further capitalisation. I accept the point of view of a number of Government members that further capitalisation is not always the highest priority for a Government at a particular time. I myself have promoted approaches that would involve subsidiaries of State-owned enterprises being involved in joint ventures, and I think that that is a positive approach. For example—and I know that the Greens would not be happy with this—we can see whether we can ever crack the coal-based hydrogen fuel cell approach, which works now. There is no doubt that it works; between the Coal Research Association and Industrial Research Ltd, we see it happening.

There is a no-emissions hydrogen production that goes into a battery that can drive a car. It happens in New Zealand; it happens in my electorate already. The trouble is that it is too damn expensive. But over a period of time I am sure that as research goes on, we can reduce that. But the question then is whether we want to have all of that production and distribution within a State-owned enterprise, or whether there is room for partnerships at the subsidiary, or subsidiary of the subsidiary level, where that approach can be taken. I want to make it clear that I do not think coal is sexy—I am not with Mr Brownlee at all on that—but I do not want to rule out its use at some stage in the future. But even if people do not like that example, or do not want to take that approach, there are within Meridian, for example, three or four areas where a subsidiary is currently generating electricity within boilers. It is a really good, world-leading technology that Meridian owns, and something that almost certainly will not be properly developed in New Zealand, because we do not happen to run most of our home heating through boilers. But the ability to generate electricity within a boiler system and then recycle it back into the grid is something that has a lot of potential. It is likely to be most used in the north-east United States and within Europe.

But I think we need to look for partners so that we keep some skin in the game, rather than do what we have too often done in the past, which is sell off that technology and lose all further rights to it. We should use the intellectual property we have in order to develop and have an ongoing return for New Zealand—and eventually to the taxpayer—without our having to put a hell of a lot more money into a risky European - North American venture. If we put it in as intellectual property and lose, that is not the end of the world. But if we have a potential for getting money back, then that is something that should be done.

In a similar way, I think we need to keep on being innovative in relation to the way we finance some of the other State-owned enterprises. I was involved, as far as Kiwibank was concerned, in what was effectively their second-level capital arrangements. The bank has, in order to fulfil its prudential requirements, what is effectively preference capital. Therefore it is not debt, and it means that the bank can lend more.

💬 Chris Auchinvole: They need more money.

Well, it does need more money, but I think that it is probably getting to about the limit of that. But the Government can look for a good return going forward, and a good return not only for Kiwibank—because I am sure that it is there—but, more important, for the economy through having an efficient, working New Zealand bank, and one that I hope can move into some other areas. I think there is room within the business area now for there to be some further lending on the part of Kiwibank. I think that the margins, and, if you like, the conservatism in lending, which is a result of having decisions made in Melbourne rather than in Auckland or Wellington on New Zealand business lending, is something that is holding our economy back. That is not something that can be changed immediately, but over a period of time it could be changed, if Kiwibank continued to grow in a reasonable way and in a careful way within the market. But as Mr Auchinvole has pointed out, it needs capital to do that.

My view is that it could be a win-win situation if the Government decided to put some of what are some very clear, unexpected, and unbudgeted surpluses into that area. It is one of nil net fiscal cost, because there is an asset that sits with the investment, with the money it is putting in. Maybe, as education spokesperson I could argue for another use. I think education is an investment, as well, but in this case we have an ongoing asset that sits alongside the money, so it is nil net in that sense. I think from the Government accounts point of view, and from the way people overseas look at it and the way we are rated, it would be seen in a positive way, as opposed to an area that would be seen as negative by rating agencies if in fact it added to the deficit. But this sort of investment would not do that.

💬 Chris Auchinvole: Back to Meridian!

Back to Meridian. It is fair to say that Meridian is a well-performing State-owned enterprise. It would certainly not be for sale under a Labour Government. I am one of the people who will be pushing for National’s policy to sell to be matched with a policy to take it back.

Report noted.

Mighty River Power Ltd