There are two basic ways to make money in this world – do something and get paid for what you do/produce is worth, or own something that produces wealth out of all proportion to the little or no work you put in. The latter is rentier behaviour – and it’s every capitalists’ dream. You do nothing, yet you get to enjoy a big slice of society’s output.
The electricity market has been a classic example. If you own one of the big hydrodams that produce two-thirds of our power, you have basically have a licence to print money. You didn’t pay to build the thing, you’ve got no capital cost associated with it, and it costs less than a cent per kilowatt hour to run and maintain but you’re sure to earn ten times that much when you sell the power at the cost of operating the few thermal plants that make up a quarter of our electricity production.
You’re not making this massive profit because you’re a clever little dicky who has worked out a more efficient way of doing things, cutting your costs – which is the theoretical justification marginal pricing is good in ordinary markets. You’re making massive profits because you inherited a cheap electricity generator and the market that National created sets the price that you get for that power at the cost of the most expensive plant that runs to match demand.
Rentier behaviour is actually really, really bad. It kills innovation in an economy and sucks up capital and household spending that could otherwise be spent on genuine wealth creation (property speculation is the other form of rentier behavior prevalent in the New Zealand economy – so, you see what I mean). Ironically, National’s mining and oil dream, if it ever came to fruition, could take us close to being a rentier state like the Middle Eastern petro-economies – fortunately, that’s going to remain a dream that Joyce sees after a night on the pipe, because we don’t have the cheaply accessible hydrocarbon reserves he thinks we do.
Neoliberalism has been all about rentier behaviour. It’s about taking public assets and converting them into massive profit streams to private owners who do next to nothing to earn them. Infratil, which is a major owner of Trustpower, has been a chief rentier – they aim for a 20% per annum return on investment for doing nothing but owning assets that used to be in public hands and extracting a rent.
Now, Infratil, Trustpower, and Contact Energy’s share prices are plummeting after the Green/Labour announcement that the rentier behaviour in the electricity market is going to come to an end when they enter government. The fact that the prices of these companies has fallen so much just on the announcement of this policy shows that the market knows NZ Power would do its job of taking away their rentier profits and giving them back to families and businesses. It also shows that the market thinks the Greens and Labour are serious and are likely to govern soon.
You’ll notice that National has made no real effort to claim that NZ Power won’t work, because they know it will. Instead, Joyce has run around like a chicken with his head cut off (or a fatcat with his rentier income stream cut off) crying about the loss of shareholders’ paper wealth – because people struggling to pay their power bills this winter will have so much sympathy for a shareholder in Contact who is losing money on the prospect of lower power prices.
So, how much of a hit to profits is the market factoring in? Well, share price is the net present value of future dividends (in theory). From the peak just as Shearer, Norman, and Parker made the announcement to the trough yesterday, Contact fell 56 cents, or 10%. Factor in what the market sees as the odds of Labour/Greens governing (let’s say 50%) and the odds of the policy being implemented if they do (let’s say the market prices that at 80%), then a typical discount rate of 8% (a dollar today is 8% more worth having than waiting a year to get that dollar)… my maths shows that , with those assumptions, the drop we’ve seen in Contact’s share price amounts to a 33% drop in profits after NZ Power kicks in.
That equates to the market estimating that NZ Power means hundreds of millions of dollars a year less on our power bills. The bad news for electricity company owners, and the great news for everyone else who has been paying them too much for power, is that the hit’s probably going to be more like 66% of profits.