Posts Tagged ‘energy’

April 18th, 2012

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Selling your Soul: The Unintended Consequences of Asset Sales

Submissions on the new Mixed Ownership Model Bill (who dreamt that nonsense up?) closed last Friday. Although I was away on holiday, I did get mine in, though it wasn’t quite as detailed as planned. I have posted the full submission below but, in light of news out overnight, I wanted to add a few points.

My opposition to the proposal to partially sell 4 of our energy companies (and who knows what else down the line) is based not on an ideological opposition to privatisation (government should only own assets that have a public good purpose or have key national strategic value) but on the issues of finance, risk and law.

The finance argument is simple. There really is no case for selling these assets based on their poor performance, funding costs or return. Government debt may be high and set to rise but flogging the family silver provides short term gain with long term pain. The debt position in NZ (both public and private) is a structural problems and will not be solved by a $5-7b sell down of core assets.

The question of the risk of these proposed sales is perhaps more subtle. It simply comes down to how one views the provision of energy on a national scale. It is a clear public good, even if it can be provided privately (e.g solar or micro-wind) and therefore should be provided at least cost (taking into account externalities) to the public. Floating energy providers onto the stock market changes the goal of the company. It is now a profit maximizer with long term shareholder value as its primary concern. Some might argue that SOEs are already operating in that model but that’s not relevant to this argument. The key is that in order to provide a public good, ownership must be in public hands. Added to that, the changes in technology and energy availability will require national level changes, planning and investment. Diluting ownership will make this problematic. At some point, the national interest may come back into focus and then what? What of the shareholders? They may not be interested in the national interest, especially if it impacts on the share price or their dividends.

This leads nicely into last night’s news. Argentina has sensationally nationalised YPF, a unit of the Spanish energy giant, Repsol, quoting “Hydrocarbon Sovereignty” (in Spanish) and basically arguing a lack of investment by YPF in Argentina. This is out and out expropriation and Repsol has hit back with a claim for $10.5b as compensation. This has been completely rejected by Argentina, as expected. This is likely to play out very badly in the international trade and investment arena and will probably end up in the international courts, if it is not resolved diplomatically.

Now this is exactly what I alluded to in my submission around the issue of international law and any future re-nationalisation or expropriation of assets, no matter what the situation is locally. Added to that we have the TPPA lurking in the background, which may further complicate matters, especially for a National government desperate to turn everything in NZ into an investment. One may argue that there is absolutely nothing to worry about in terms of possible future legal claims or problems but history shows us that this is a serious and unconsidered risk. Certainly I have not seen it in mentioned in any commentary. The government tries to duck and weave around the wording and structure of the sales model but it really needs to rethink the whole process from start to finish.

 

Submission on the Mixed Ownership Model Bill

The main purpose of the bill is to raise funds to reduce government debt and provide funds for new spending on public services. Reducing government debt is a laudable proposition and one can do that by increasing taxes, cutting expenditure or selling assets.

 

The government has chosen to sell publicly owned assets, specifically energy companies, in order to raise somewhere between $5 and $7b. These numbers are purely guesswork and will depend on a number of factors, including current market conditions, offering price and the structure of the companies post-sale.

 

This proposed bill is of concern for a number of reasons, which are listed below. I have categorized them into three areas: finance, risk and legal.

 

1)   Finance: The prime reason given for selling energy companies is that they provide a poor return to the government and that private owners may extract more “efficiencies” from the businesses. There has been no clear-cut evidence provided to support the former assertion, namely that the return from the energy companies is lower than the cost of government debt. Furthermore, there is scant evidence to support the proposition that privately run energy companies are any more efficient than publicly run ones. As we have seen from the Pike River disaster, private companies tend to be poor managers of risk and cut costs wherever possible, in order to increase profits. As many costs are externalized as possible to achieve this goal. In the energy business, this is a very dangerous approach. It seems that the financial argument is weak at best.

2)   Risk: As alluded to above, risk management is of serious concern when privatizing companies in the energy space. Energy provision is a prime public good and should therefore be provided by the public. Like water, energy is a pre-requisite for basic survival and should, therefore, not be seen as a profit maximizing good. By giving up pubic ownership of these basic assets, we open ourselves up to a poorer service, which may be based on ability to pay rather than a right to have the basic provision of energy. We may also lose the ability to make changes to and investment in the development of new energy production and networks. Investors, even with a 10% cap and other restrictions, will still have rights and views (see legal for further argument on this point), which may not be aligned with the public good. As well as safety and control risks, there is the risk of prices being raised over and above what might be appropriate. The example of the Bolivian water privatization and the Bechtel corporation (see Cochabamba riots of 2000) is a good example of what can go wrong when private interests are allowed to control basic pubic goods. Theses risks should not be taken lightly.

3)   Legal: Global investment rules have been expanded significantly over the last 20 years. NAFTA, the WTO and numerous bilateral trade agreements, have made the investment law field extremely complicated. What is clear, though, is that foreign investors have clear rights and these rights may, in some cases, trump domestic law and the expectations of the domestic citizenry. Examples of this are the Santa Elena case in Costa Rica, the Metalclad Corporation vs. The United Mexican States and the Ethyl Corporation vs. Canada. These are a small example of cases taken by foreign investors against states, where they feel their rights have been infringed. This could be for a number of reasons: environmental laws, human rights laws or expropriation (e.g. arising from renationalization or similar action).  We have transnational agreements being negotiated in secrecy (the Trans Pacific Partnership Agreement (TPPA)), which may contain further restrictions on the ability to make decisions based on domestic considerations but perceived as harmful to foreign investors. The making of new international investment rules has seen many unintended consequences. The same outcomes may apply to this bill.

 

In summary, it is clear that the proposed bill has some serious problems. There are many consequences, known and unknown, which give cause for deep reflection and concern. The financial argument is weak and there are other ways to raise funds for public expenditure. Of more concern is the risk and legal framework that may end up being applied. The examples are too numerous to fully list but they are clear and unambiguous as to the impact on the local population and its finances.

 

This bill seems predicated on an ideological desire to privatize state assets and not on any serious and well thought out argument for doing so. I would therefore argue strongly against its implementation.

 

 

Raf Manji,

Director,

Sustento Institute,

Christchurch.

 

January 26th, 2011

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NZ Privatisation: TINA is back in town

Today John Key revealed the policy what we have all been waiting for: privatisation or, in his words, partial asset sales. Let me be clear that I am not against privatisation as a whole but certainly I am very concerned about the sale of key and core infrastructure assets. I also noticed how John trotted out the “TINA” message: there is no alternative otherwise S+P will downgrade us. Expect to hear this being repeated as some kind of mantra…..otherwise saying we are dependent on the opinion of the same guys who rated dodgy Collateralized Debt Obligations (CDOs) as AAA.

There are some key human requirements for any society. We are lucky to be blessed by all of them: plentiful water, energy generation and food production. Any decent society with these assets should be able to provide them to all people at the lowest possible cost. Why? Because it can.

We are already well into a fight over NZ’s water assets and consumers are paying through the nose for basic food items especially dairy in which we are global leaders. Energy is also costing us more and more each year as the dysfunctional electricity market continues to fail.

Contact Energy has already been sold off to foreign investors with Australian energy company Origin owning 51%. Expect more pain in the pricing policy we have witnessed since this company was first floated. I have never understood the need for energy generation (water is even more inexplicable) to be a competitive process between private companies. Deregulation has not delivered cheaper prices and yet more privatisation is on the cards.

The deregulation of the 80s made was driven by a desire for greater efficiency and more dynamic management as well as the demand from financiers for new investment prospects. But change could have been brought about in different ways such as simply instituting new management, guidelines etc. It would be very possible to run a state owned company focused on providing electricity, in all forms, with the sole focus of the customer.

So instead of selling off more energy assets we should be thinking about changing the model. I favour looking at some form of  quota based allocation which comes at the cheapest possible price (a break-even number) with market pricing on top of that. These quotas could be traded (as in DTQs 0r Domestic Tradable Quotas) as part of a generalised carbon trading scheme. But the important issue is that energy is a basic human need and in New Zealand this can and should be provided at the cheapest possible cost. I do not believe, and have seen no evidence, that the current system delivers this.

We should also address the silly argument about “mum and dad” investors. Please no more of this patronising label. Lots of people are investors, not just these mythical and no doubt unsophisticated “mums and dads”. But let’s point out the very obvious hole in this argument. We already own these companies, yes us taxpayers, mums, dads and bubs…we own it already so why do we need to re-buy into it? plenty of money for the investment banks involved in the float (they have been pushing this for ages). More importantly there will be losers: low income people who simply could not afford to buy into the share bonanza….it’s just another process for transferring wealth from low to high income earners. This will look great for some but ultimately we all lose in the end and inequality is further increased.

Privatisation is only going to make things worse. It’s time to put people before profit.

Sorry John, there is an alternative.

October 11th, 2007

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Examining a warmer climate

Bjorn Lomborg is back with a new book and lots of publicity. Called “Cool It” it looks more closely at the benefits as well as the costs of a warming climate. What separates Lomborg from the climate change sceptics is that he readily agrees on the problem but not the solutions.

His main focus is always to step back from the hysteria and hype and look more pragmatically at the problem. I would say this is a sensible approach though it’s hard to ever get sensible debate when it comes to the environment.

Nothing else quite allows people to represent themselves as good or worthy and label others as bad or dirty.

Lomborg is not into saving the planet. He’s into calm reasoning and tries to stay within the remits of his expertise as a statistician. Interestingly enough Al Gore has been getting a judicial working over in the UK over his alarmist portrayal of the situation.

The moral of this story is that we need to make reasoned policy based on what we know and can observe. That a warmer climate presents severe challenges is not without doubt but let’s keep a clear head whilst working out what, if anything, we can do about it.

Letting issues like this develop into a battle between good and bad just leads to reactive approaches. Lomborg falls somewhere in between and is worth listening too even if just to disagree with.

September 27th, 2007

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Montreal Protocol shows how its done

Thanks for Celsias for this post on the updating of the Montreal Protocol. It seems obvious that this successful treaty should be the starting point for any treaty on greenhouse gases but many of the lessons derived from those intense negotiations haven’t fully be absorbed into the Kyoto process.

It’s not too late to have another look. Many Kyoto advocates have told me there is too much time and money invested in it to change tack now. Well that’s not good enough. If Kyoto is not going to work then it should be set aside. It doesn’t mean a step back but a step forward.

So i’m dusting off my proposal based around Montreal. I think it’s time to realise that major reductions can only come from the supply side.

See Climate Control and also have a look at Oliver Tickell’s proposal Kyoto 2.

August 28th, 2007

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Oil, Money, Love: The Energy Flow of Life

The recent financial crisis has made me think more about how important money is in our lives. Without the liquidity (cash) pumped into the system by the Federal Reserve the whole financial system could, and probably would, have siezed up.

By that i mean the flow of money would have dried up and banks would have stopped lending and peopl would have run out of money and been queueing at the banks to get cash out. Of course there isn’t any but you knew that already :-)

It shows us two important facets of our society: one is that we depend on the financial system for our daily lives; two is that we are living on the verge of a serious breakdown. It’s a bit like trying to stay on top of the bills.

I don;t know if there are any readers who remember the Depression but they will understand what i am talking about.

I believe we are all systems within systems, whether at the atomic level, individual being or universe. Systems depend on flow and feedback in order to keep stable. We need energy through food or sunlight to survive.

The parellels of the financial crisis and oil crisis are interesting. I remember back towards the turn of the millenium when we had a mini crisis in the UK when oil deliveries were delayed . The supermarkets were within 24 hours of running out of food since they used just in time delivery. The crucial importance of energy (in the form of oil) was highlighted but more than that it showed how close to the edge we were living.

We depend on a continual flow of energy to survive. This brings me to love. Yes that old favourite. We can’t do without that either. The great thing about love is that it is free and easy to give. But as we know, when love is lacking and not flowing our system breaks down: into war, violence, depression and death. Without a flow of love nothing is worth living for. We can see the effects all around us.

Surely love is something we can never run out of :-)

July 31st, 2007

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The True Cost of Energy

The energy debate continues to go in circles. Usually its starts with the renewable sector heavyweights: wind and solar. The free and usually reliable inputs of wind and sun are very attractive. The technology is improving and, in the case of solar energy, the transmission mechanism is close at hand.

One company in the US has actually started a rental program for solar heating. I like this idea because capital cost is a problem for many people. Energy as a service is a good business model.

Solar is a great option because you can localise it. Hopefully the technology will continue t to improve.

Wind has its drawbacks due to the requirements of location and serious land mass. But again it suits some places better than others. But how about small wind turbines on every roof?

Little and often i say. Every little bit counts.

Biomass is the latest technology on the block, a small step up from chucking wood in the burner which is very popular and cheap in New Zealand. We can grow a lot of wood down here. The biomass and biofuel solution reveal a problem in our approach.

It doesn’t have to be one or the other. It can be both/and. It’s clear now there is no one solution that is way better than another. Let the market continue to work it out. And this brings me to the main point which is that we must have a properly priced energy market.

This is going to require a major change. I have long banged on about pricing in environmental costs at source and whilst Trucost is doing great work in that area there is a long way to go.

So how could this work? Well here are a few examples:

Carbon

Let’s say we have established a price for “carbon”,this being a proxy for externalities caused in the combustion of fossil fuels. The most efficient way to alert the market to this cost is to price it in at source ie where the fossil fuel is sold wholesale. This would be the global oil, gas or coal exchanges.

In my paper, Climate Control, i argued for the establishment of a World Energy Agency, where all fossil fuels were sold through. Simply add on the price of carbon and leave it at that. As a one point global process it would be very simple and then that price information would flow out across the world. End of story.

But there are two issues here:

One is that we are trying to stop carbon quantities breaching certain levels. The price elasticity of fossil fuel consumption may hinder this somewhat as consumers of oil products are slow to change demand in response to price.

The second issue is interesting. What happens to that money? Who does it belong to? As a charge being levied by the WEA it has no soveriegn recipient. So i propose this “charge” goes into a Global Environmental Contingency Fund (GECF). I want to make clear this is not a tax, it is a cost. It is therefore directly related to an expense which is in this case the use or environmental services.

Let’s stop using the word tax. It’s incorrect and draws attention from the fact that we are simply paying for a service we are using.

So how could the GECF work? I have to give that some more thought but the rough idea is that it would hold those funds in bonds (sovereign) or could lend them out at low interest to fund projects that have a positive environmental benefit. This is the tricky bit. But let’s sit with the first piece. The money comes in and sits in bonds. That’s it. So it’s not being spent on projects of a dubious outcome. As the title implies its a Contingency Fund. We don’t know for sure what will happen in the future. The money can be repaid if required by discounting the price of fossil fuels if it turns out that the cost has turned out to be lower.

It’s a hard one to get right on  a global level but worth a look.

Agriculture

In New Zealand we have trouble with dairy farming, a highly profitable business which has seen huge swathes of land converted from other activities to supporting cows. The externalities of this business are numerous but center around water pollution through fertilizer run off into streams and down into the water table as well as cows crapping all over the place..oh yes and the methane burps.

Here it would be simpler. A charge would be applied per head of cattle and immediately be applied to cleaning up that pollution at source. Why should the taxpayer pick up this tab. Its a cost for the consumer to bear and if the consumer doesn’t like the slightly higher price then the producer will quickly alter his habits.

The moral of this  story is simple: We need to know the true cost of our global economic activity. Then as consumers we can respond appropriately.

Trying to say which energy source is better than another is simply guesswork.

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About

"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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